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BUSINESS  ORGANIZATION 
AND  ADMINISTRATION 


BY 

J.  ANTON  DE  HAAS,  M.  A.,  Ph.D. 
n 

Professor  of  Foreign  Trade  at  New  York  University. 
Formerly  Instructor  at  Stanford  University,  Adjunct 
Professor  at  the  University  of  Texas,  Professor  at 
Ohio  State  University,  Lecturer  at  Columbia  Uni- 
versity, Professor  at  the  University  of  Washington, 
Professor  at  the  University  of  Rotterdam,  Holland. 
Author    of    Foreign    Trade    and     Shipping,    etc. 


THE  GREGG  PUBLISHING  COMPANY 

NEW  YORK        CHICAGO        BOSTON        SAN  FRANCISCO 
LONDON 


COPYRIGHT,    IQZO,    BlT  THE 
GREGG  PUBLISHiNG  LOMPANl 

G-57-F-10 


Made   in    the    United    States    of    America 


BUSINESS    ORGANIZATION 


PREFACE 

This  book  IS  written  in  the  belief  that  there 
exists  a  need  for  a  text  which  raay  form  the  basis 
of  a  short  course  in  the  fundamentals  of  business 
administration  and  management  and  which  will 
bring  before  the  student,  those  bigger  business 
problems  upon  the  proper  solution  of  which  success 
in  business  largely  depends. 

In  some  schools  such  a  course  may  supplement 
the  work  in  book-keeping  and  office  practice, 
while  in  others  it  may  form  an  introduction  to 
the  more  specialized  and  advanced  courses  in  the 
field. 

Even  a  bare  statement  of  the  most  essential 
facts  of  business  practice  is  an  ambitious  under- 
taking. Much  had  to  be  omitted  which  might  have 
been  included.  In  fact,  the  most  difficult  task  in 
the  preparation  of  this  volume  was  the  elimination 
of  material. 

It  is  hoped  that  in  this  process  of  trimming, 
nothing  has  been  pruned  away  which  is  absolutely 
necessary  to  give  the  student  a  picture  of  the  most 
common  business  situations. 

The  references  at  the  end  of  each  chapter  are 
not  intended  to  present  a  complete  list  of  books  on 
any  one  subject.     The  limited  resources  of  most 


,     547S30 


11  BUSINESS    ORGANIZATION 

libraries  make  it  advisable  to  give  only  those  books 
which  are  considered  standard,  and  which  are  best 
suited  to  the  needs  of  the  kind  of  students  for 
whom  this  book  is  intended.  Teachers  may  also 
find  these  references  an  aid  in  planning  their  own 
collateral  reading. 

As  will  be  observed,  the  references  given  In  con- 
nection with  the  "Questions  for  Further  Study" 
are  usually  taken  only  from  one  or  two  of  the 
references  mentioned.  This  is  done  intentionally, 
so  that  these  questions  may  be  useful  in  schools 
where  only  a  limited  number  of  the  most  essential 
reference  books  can  be  obtained. 

Both  sets  of  questions  are  to  be  taken  merely  as 
suggestions.  They  do  not  by  any  means  exhaust  the 
possibilities.  Many  other  and  more  vital  questions 
will  be  brought  out  in  the  class  discussion  which  must 
form  an  important  element  in  the  teaching  of  this 
subject. 

The  teacher*s  chief  task  will  be  to  bring  the  ma- 
terial of  the  text  in  intimate  relation  with  the  busi- 
ness life  of  the  community.  This  is  no  small  task,  but 
it  would  be  difficult  to  find  a  field  of  study  which 
offers  the  teacher  a  greater  opportunity  to  draw  upon 
the  knowledge  which  the  student  has  unconsciously 
acquired  and  to  sharpen  his  powers  of  observation 
and  analysis. 

A  large  amount  of  space  has  been  devoted  to  the 
problems  of  labor  management  and  to  the  payment 


BUSINESS    ORGANIZATION  111 

of  wages.  These  are  at  present  our  most  vital  indus- 
trial problems.  Wrong  prejudices  are  more  likely  to 
lead  to  disastrous  results  in  the  settlement  of  these 
problems  than  in  any  other  business  situation. 

If  this  little  volume  proves  an  aid  to  the  teacher  in 
awakening  in  the  mind  of  the  student  a  critical, 
analytical  attitude  toward  his  surroundings,  it  will 
not  have  been  written  in  vain. 

J.  Anton  de  Haas 

New  York  City, 


BUSINESS     ORGANIZATION 


CONTENTS     ' 

Chapter  Page 

I.  The  Elements  of  Business  Success   ...        i 

Knowledge — Scientific  Attitude — ^Absolute  Honesty — 
Service — Social  Sense — Human  Sympathy — Character 
— Summary. 

II.  Business  Organization  .    .    .^ 13 

Modern  Business  Is  Highly  Specialized — The  Two  Large 
Classes  of  Business  Enterprises — Industrial  Enter- 
prises— The  Extractive  Industries — Consen/ation  of 
Assets — Manufacturing  Industries — The  Commercial 
Enterprises — The  Relative  Importance  of  These  Enter- 
prises— Efficiency  a  Social  Duty— Business  Analyzed 
According  to.  Functions — Departmental  Division:  (i) 
Purchasing  (2)  Service  (3)  Production  (4)  Selling 
(5)    Accounting — Organization    Charts — Summary. 

III.  The  Proprietorship  of  a  Business     ...     35 

The  Owners  May  Be  One  or  Many — ^The  Corporation — 
Advantages  of  Incorporation — Launching  a  Corpora- 
tion— The  Value  of  Stock — Different  Classes  of  Stock — 
Preferred  Stock.  How  It  Arises — Different  Kinds  of 
Preferred  Stock — The  Control  of  the  Corporation — The 
Payment  of  Stock — ^Transfer  of  Stock — Dividends — 
Summary. 

IV.  Financing  an  Enterprise  {Working  Capi- 

tal)     54 

The  Owned  Capital  of  an  Enterprise — Working  Capital 
and  Investment  Capital — Factors  Influencing  Amount 
of  Working  Capital  Needed.  The  Turnover — Seasonal 
Production  Requires  Large  Working  Capital — Borrow- 
ing Working  Capital.  Trade  Credit — Borrowing  from 
the  Banks — The  Promissory  Note — ^The  Security  Back 
of  the  Loan — Merchandise  as  Security  for  Loans — 
Bills  of  Exchange  or  Drafts — The  Acceptance — ^The 
Credit  System — ^The  Note  Broker — The  Credit  Man — 
Summary. 


VI  BUSINESS     ORGANIZATION 

Chapter  Page 

V.  Financing  an   Enterprise   (Borrowing  on 

Long  Time)      76 

Problems  of  Financing  a  Growing  Business — ^Advan- 
tages of  Borrowing  on  Long  Time — Disadvantages  of 
Borrowing  on  Long  Time — Need  for  Security — The 
Mortgage — The  Bond  Issue — The  Trust  Company — 
Closed  and  Open  Mortgages — Equipment  Trust  Bonds 
— Collateral  Trust  Bonds — The  Income  Bond — The 
Debenture  Bond — The  Life  of  Bonds — The  Price  of 
Bonds — The   Repayment  of   Bonds — Summary. 

VI.  Financial  Institutions 91 

The  Bank — The  Commercial  Banks — The  Making  of 
a  Deposit — The  Receiving  Teller — The  Individual 
Bookkeeper— The  Paying  Teller— The  Note  Teller— 
The  Clearing  Hous& — Safety  Deposit  Department — 
Other  Departments  of  a  Commercial  Bank — Loan 
and  Trust  Companies — Savings  Banks — Insurance 
Companies — Reducing  Uncertainty  to  Certainty — 
Insurance  as  a  Business— Different  Types  of  Insurance 
— Fire  Insurance — Marine  Insurance — Credit  Insur- 
ance— Fidelity  Insurance — The  Stock  Exchange — The 
Brokers — How  Stocks  and  Bonds  Are  Sold — Summary. 

VII.  Management 124 

The  Problems  of  Management — The  Manager  as  a 
Jack  of  All  Trades — The  Line  Organization — The 
Duties  of  the  Foreman — What  Keeps  the  Men  at 
Work — The  Problem  of  Securing  Co-operation — The 
Planning — Lack  of  Accurate  Knowledge  Becomes  Evi- 
dent— Scientific  Management — The  Management 
Should  Look  After  All  Management  Functions — ■ 
The  Human  Factor — Motion  Study — Rest  Periods 
Must  Be  Planned — Other    Considerations — Summary. 

VIII.  The  Wage  Question 152 

What  the  Employer  Buys — He  Buys  a  Workingman's 
Time.  The  Day  Wage — He  Buys  Output.  The  Piece 
Rate — Need  for  Accurate  Information — Co-operation 
between  Employers  and  Employees — He  Buys  Output 
and  Time.    The  Task — Setting  a  Task — Summary  of 


BUSINESS     ORGANIZATION  VU 

Chapter  Page 

Wage  Payments — ^The  Demand  for  Standardized  Con- 
ditions— The  Group  Bonus — Profit  Sharing — The  Wages 
of  Store  and  Office  Workers — Relation  of  Workman  to 
Employer — Summary. 

IX.   The  Service  Department      174 

What  Is  Included  in  the  Service  Department — The 
Employment  Office — Labor  Turnover — Labor  Turnover 
an  Expense — Hiring  Men — Securing  Applicants — Fil- 
ling Vacancies — Selecting  the  Workers — Vestibule 
Schools — Introducing  the  Employee  to  His  Surround- 
ings— Record  of  Service — Investigation  of  Grievances 
— ^A  Check  on  Labor  Turnover — The  Educational 
Office — The  Suggestion  Box — Health  Department — 
Safety  and  Sanitation  Department — Welfare  Work — 
Summary. 

X.  Selecting  the  Site .   202 

The  Location  of  the  Plant  Demands  Careful  Study — 
Nearness  to  Raw  Material — Nearness  to  Market — 
Available  Labor  Supply — ^The  Power  Factor — ^Associa- 
tion with  Other  Industries  Is  Beneficial — Transporta- 
tion— Whether  to  Locate  in  City  or  Country — Induce- 
ments Offered  by  Cities — Deciding  upon  the  Site — 
Wholesale  and  Retail  Locations — The  Retail  Store 
Location — Summary. 

XL  Planning  the  Building 223 

A  Poor  Building  Means  High  Cost — The  Factory  Lay- 
out— The  Various  Types  of  Factories — The  Assembling 
Industries — The  Production  Centers — Transportation 
in  the  Factory — Other  Considerations — The  Building 
Itself — Planning  the  Retail  Store — ^The  Retail  Building 
— The  Receiving  and  Shipping  Rooms — Planning  the 
Office — Summary. 

XII.  Purchasing 244 

Careful  Buying  Is  Essential  to  Successful  Selling — ^Three 
Classes  of  Purchases — The  Requisition — Checking  the 
Quantity — ^The  Stock  Clerk's  Duties — Collecting  In- 
formation— Sending    Out    Requests   for    Quotations — 


VIU  BUSINESS      ORGANIZATION 

Chapter  Page 

What  Determines  the  Placing  of  the  Order — Following 
Up  the  Order — The  Purchasing  Agent  as  a  Seller — 
The  Retail  Buyer — Determining  the  Demand — How 
Buying  Is  Done — Supervising  the  Selling — ^The  Pur- 
chasing Agent  in  the  Retail  Store — Summary. 

XIII.  Marketing 266 

The  Term  Defined — ^The  Marketing  of  Farm  Products 
— ^The  Local  Buyer — Grading  of  Products — The  Ex- 
changes— The  Wheat  Trade — Financing  the  Wheat 
Crop— The  Cotton  Market— The  Marketing  of  Other 
Farm  Products — ^The  Marketing  of  Manufactured 
Products — ^The  Various  Middlemen  Defined — Selling 
at  Retail — The  Department  Store — The  Chain  Store — 
The  Mail  Order  Business — Advantages  and  Disadvan- 
tages of  Selling  by  Mail — The  Manufacturer  and  the 
Market — Summary, 

XIV.  Selling  and  Advertising 289 

Selling  an  Important  Function — Manufacturer  and 
Middleman  May  Co-operate  in  Selling — Advertising  as 
an  Aid  in  Selling — Advertising  and  Selling  Compared — 
Attention — Interest — Meeting  Argument s — Where 
Advertising  Differs — ^Action — Knowledge  of  the  Goods 
— Knowledge  of  the  Buyer — ^The  Advertiser  Faces  Pecu- 
liar Problems — Local  Advertising — Price  Maintenance 
— ^The     Sales    Organization — ^The     Buyer — Summary. 

XV.  Foreign  Trade 316 

Foreign  Trade  Necessary — The  Foreign  Traders.  Sell- 
ing Direct — Selling  through  Middlemen — It  Is  Neces- 
sary to  Study  the  Market — The  Tariffs  Must  Be 
Studied — Private  Sources  of  Information — Banks  Pro- 
mote Trade — Commercial  Museums — Government 
Sources  of  Information — Miscellaneous  Government 
Aid — Combination  for  Export  Trade — Protection  of 
Trade-Marks — ^Advertising  in  Foreign  Markets — The 
Sample  Fair — How  Goods  Are  Quoted — Methods  of 
Payment — Summary. 


BUSINESS     ORGANIZATION  IX 

Chapter  Page 

XVI.  The  Technic  OF  Foreign  Trade 336 

Checking  the  Order — Preparing  the  Order — Procuring 
Freight  Space — Marine  Insurance — Invoicing  the  Ship- 
ment— The  Boxes — The  Dock  Receipt — The  Bill  of 
Lading  (B/L) — The  Export  Declaration — Other  Docu- 
ments Required — Requirements  of  the  Customs  Author- 
ities— Disposition  Made  of  These  Documents — Notify- 
ing the  Consignee — The  Functional  Middleman — 
Importing — Buying  Methods — The  United  States  Cus- 
toms— How  the  Appraisals  Are  Standardized — Sum- 
mary. 


' •    ■    ^    V 

BUSINESS     ORGANIZATION         ' 


CHAPTER  I 

THE  ELEMENTS  OF  SUCCESS 
IN  BUSINESS 

Knowledge.  The  first  thing  required  for  success  in 
business  is  accurate  knowledge  of  business  affairs  in 
general,  and  of  the  business  in  which  one  is  engaged 
in  particular. 

The  old-time  business  man  learned  all  that  he 
knew  about  business  by  "doing."  In  the  same  way, 
the  physician  and  the  lawyer  at  one  time  prepared 
for  their  profession  by  reading  in  an  office  of  an  es- 
tablished practitioner  and  by  assisting  him  in  his 
cases.  The  training  which  these  professional  men 
received  in  this  way  was  very  inadequate  as  com- 
pared with  the  training  students  now  receive  in  our 
medical  and  law  colleges. 

The  practitioners  had  poor  laboratory  equipment, 
could  devote  but  a  portion  of  their  time  to  the  giving 
of  instruction,  their  own  preparation  was  not  any 
too  thorough,  their  experience  limited,  and  their 
teaching  ability  questionable.  This  inefficient  method 
of  training  for  the  professions  has  been  universally 
abandoned.  The  business  man,  however,  must  still 
to  a  large  degree  depend  on  the  old-fashioned  "ap- 
prentice" method  of  training. 


BUSINESS     ORGANIZATION 


Only  recently  have  the  schools  and  universities  in 
the  United  States  undertaken  to  teach  the  essentials 
of  business.  Their  neglect  in  this  respect  has  led 
many  corporations,  industries,  banks,  foreign  trade 
concerns,  and  wholesale  and  retail  stores,  to  establish 
their  own  schools.  This  is  unsatisfactory,  for  it  re- 
sults in  an  unnecessary  duplication  of  equipment  and 
personnel,  placing,  thereby,  a  heavy  burden  upon 
business. 

The  need  for  better  trained  men  and  women  in 
business  has  become  daily  more  and  more  apparent 
to  the  business  man.  The  high  prices  of  raw  material 
and  labor  make  it  more  urgent  than  ever  that  the 
entire  staff  be  well  trained.  Lack  of  knowledge  of 
methods  and  processes,  lack  of  training  in  the  keep- 
ing of  correct  records,  or  in  the  management  of 
finances,  in  fact,  every  lack  of  knowledge  means  les- 
sened efficiency,  high  cost,  smaller  profits,  and  pos- 
sible failure. 

The  impression  that  prevails  in  many  places  that 
"nerve"  will  make  one's  way  is  entirely  erroneous. 
To  be  sure,  a  certain  amount  of  aggressiveness  is 
needed  to  press  to  the  front,  but  a  position  thus 
achieved  cannot  be  held  unless  the  "nerve"  be  backed 
up  by  ability  and  knowledge. 

Scientific  Attitude,  In  order  to  make  one's  knowl- 
edge truly  useful  it  is  necessary  to  cultivate  what 
may  be  called  the  "scientific  attitude  of  mind."  This 
means  the  attitude  towards  life  of  one  who  desires  to 


BUSINESS     ORGANIZATION 


know  the  actual  facts  and  is  not  satisfied  with  opin- 
ions or  offhand  guesses. 

There  is  a  premium  in  active  Hfe  upon  arriving  at 
decisions  quickly  and  without  loss  of  time.  But  fre- 
quently conclusions  which  are  the  result  of  careful 
investigation  lead  to  wiser  actions.  The  scientific 
mind  does  not  jump  at  conclusions,  its  methods  may 
arouse  impatience  with  those  who  are  accustomed  to 
trusting  to  intuition,  but  the  days  of  the  "rule  of 
thumb"  methods  are  numbered.  More  and  more 
careful,  deliberate  action  based  upon  carefully  ac- 
cumulated knowledge  is  taking  the  place  of  quick, 
snap- judgment,  and  hair-trigger  action. 

To  take  an  example  in  the  accounting  field.  Many 
business  men  fail  to  keep  good  accounting  records  and 
are  remiss  in  the  keeping  of  cost  records,  and  still 
there  is  no  other  way  in  which  accurate  knowledge  of 
the  condition  of  a  business  can  be  obtained. 

The  lack  of  good  records  lies  at  the  bottom  of  much 
reckless  price  cutting.  Many  retailers  are  actually 
selling  goods  at  a  loss  from  ignorance  in  regard  to  the 
cost  of  doing  business.  The  recent  interest  of  busi- 
ness men  in  "uniform  accounting,"  i.  e.,  standardized 
sets  of  accounts,  is  in  part  the  result  of  the  hope  that 
competing  firms  may,  by  their  adoption,  gain  a  better 
knowledge  of  costs.  Price  cutting  which  is  not  based 
upon  accurate  cost  data  results  in  injury  to  all  firms 
dealing  in  the  same  line. 


BUSINESS     ORGANIZATION 


William  C.  Redfield,  in  The  New  Industrial  Day 
(p.  185),  gives  an  interesting  illustration  of  the  igno- 
rance of  many  business  men  of  important  aspects  of 
their  own  business : 

Into  the  office  of  a  large  factory  in  New  York  State 
went  one  day  a  competitor  of  the  concern  who  thought 
it  courteous  to  call  upon  his  rival.  He  was  cordially 
received  by  the  unassuming  owner  and  finding  the 
atmosphere  congenial,  began  to  talk  on  matters  of 
mutual  interest.  Being  asked  whether  he  had  not  se- 
cured a  certain  order,  he  answered  in  the  affirmative, 
saying  that  that  work  was  a  specialty  with  him  and  that 
he  had  been  able  to  reduce  the  cost  for  material  and 
labor  to  about  eighteen  cents  each  piece.  His  host  said 
that  he  had  not  himself  given  any  special  study  to  that 
particular  article,  and  that  he  was  very  glad  to  have 
suggestions. 

When  the  visitor  left,  the  owner  crossed  the  room  to 
his  cost-keeper  whose  eye  he  had  seen  twinkling,  and 
asked  him  what  the  last  lot  of  these  goods  cost  for  labor 
and  material,  and  was  told  six  cents  each.  The  trouble 
with  the  visitor  was  that  he  had  no  realizing  sense  of  his 
own  heavy  burden  charges,  and,  ignoring  them  and 
forgetting  selling  cost,  he  had  underbid  the  man  whose 
actual  outlay  was  but  one-third  his  own.  This  is  but 
one  of  many  possible  illustrations  showing  that  the  man 
who  "knows  his  own  business"  is  often  ill-informed  about 
important  factors  in  it. 

In  every  field  of  business  activity  there  is  found 
the  man  who  is  not  satisfied  until  he  knows,  until  he 


BUSINESS     ORGANIZATION 


has  discovered,  the  one  best  way  of  reaching  his  goal, 
and  also  the  man  who  is  satisfied  to  trust  to  his  bluff 
to<  carry  him  through,  and  is  willing  to  follow  the 
rut  of  precedent.  The  latter  may  score  an  occasional 
spectacular  success;  the  former  builds  more  slowly 
for  a  certain  future. 

Science  is  merely  an  orderly  system  of  collecting 
information.  It  is  impossible  to  gather  information 
which  will  be  really  useful  until  the  problem  is  first 
carefully  analyzed  and  taken  to  pieces  so  that  the 
essentials  may  be  separated  from  the  non-essentials. 
This,  therefore,  is  the  first  step  in  all  scientific  work. 
First  comes  an  analysis  of  the  problem.  The  next 
step  is  to  gather  information  which  is  lacking.  In 
gathering  this  information,  great  care  must  be  exer- 
cised that  hearsay  and  opinion  are  not  taken  for 
accurate  facts.  Where  no  facts  are  available,  enough 
"opinions"  should  be  gathered  to  make  it  possible  to 
discover  in  how  far  these  opinions  are  likely  to  be 
correct,  and  in  how  fcU*  they  are  merely  based  upon 
prejudice. 

The  next  step  is  to  arrange  this  information — to 
tabulate  it  so  that  it  is  possible  to  arrive  at  a  conclu- 
sion. A  wastebasket  full  of  facts  is  meaningless. 
They  should  be  arranged  so  that  all  those  which 
point  in  one  direction  are  brought  together  and  are 
offset  by  those  which  seem  to  point  to  a  different 
solution,  very  much  in  the  same  way  as  accounting 
records  give  a  systematic  and  understandable  expo- 


BUSINESS     ORGANIZATION 


sition  of  a  large  variety  of  facts  which  otherwise 
would  be  meaningless.  In  the  interpretation  of  these 
facts,  the  business  man  will  find  ample  opportunity 
to  use  all  his  knowledge  and  experience.  To  sum  up 
the  whole  matter  in  simple  language,  the  scientific 
method  as  applied  to  business  means: 

1.  Determine  just  what  it  is  you  want  to  do. 

2.  Collect  all  possible  infornriation.     Make  certain  that 

you  collect  facts,  not  opinions. 

3.  Determine  on  the  basis  of  this  information  which  is 

the  best  way  to  proceed. 

4.  Then  go  ahead. 

5.  Keep  careful  records  to  make  it  possible  to  check 

constantly  the  results  obtained,  for  in  no  other 
way  can  the  efficiency  of  different  methods  be 
compared. 

Absolute  Honesty.  After  all,  there  is  a  streak  of 
dishonesty  in  the  man  who  depends  on  his  "nerve"  or 
"bluff."  He  is  parading  unjder  false  colors;  is  assum- 
ing a  knowledge  which  he  does  not  possess.  In  deal- 
ing with  customers,  such  a  man  will  "aever  admit  that 
he  does  not  know,  even  in  cases  where  it  would  be  to 
the  interest  of  the  customer  to  be  frank.  He  is 
afraid  to  throw  off  the  mask  which  he  has  chosen  to 
wear. 

Honesty  is  the  backbone  of  business;  without  it 
no  bank  can  exist;  and  the  retailer  depends  upon  the 
honesty  of  his  customers  as  much  as  they  depend 
upon  his. 


BUSINESS     ORGANIZATION 


If  anyone  doubts  whether  the  world  is  getting 
better,  let  him  study  the  history  of  business  relations. 
The  modern  business  man  is  honest  and  knows  that 
his  success  depends  not  upon  his  being  able  to  squeeze 
the  last  penny  out  of  any  transaction,  but  upon  the 
degree  to  which  he  serves.  Service,  dependable  ser- 
vice, and  absolute  honesty,  cqnstitute  the  foundation 
of  all  business  success.  The  large  firms  that  supply 
the  nation  and  many  customers  in  foreign  lands  with 
trade-marked  goods  are  evidences  of  the  supreme  de- 
mand for  honesty.  A  trade-mark  is  a  promise  to 
maintain  quality  which,  if  broken,  means  failure. 
If  any  proof  were  needed  that  the  dictates  of  our 
conscience,  which  prompts  us  to  deal  justly  and 
fairly  with  all  men,  reveal  to  us  the  moral  law  ac- 
cording to  which  the  world  is  governed,  business 
experience  can  furnish  that  proof.  Honesty  pays  in 
a  business  sense  because  honesty  is  a  fundamental 
need  in  human  relations.  It  pays  to  observe  it  for 
the  same  reason  that  it  pays  to  observe  the  law  of 
gravity.  Such  laws  cannot  be  ignored  without  dis- 
astrous results. 

Service.  The  introduction  of  the  concept  of  service 
m  business  has  given  all  transactions  a  different  as- 
pect. The  retailer  no  longer  looks  upon  the  customer 
as  legitimate  prey  to  be  exploited  to  the  limit;  he 
considers  how  he  may  best  please  this  stranger  so 
that  their  relations  may  be  peimanent.     The  old 


BUSINESS     ORGANIZATION 


dealer  would  say,  "A  sale  is  a  sale,"  and  would  not 
encourage  his  dissatisfied  customers  to  register  their 
complaints  and  to  return  the  goods  that  displeased 
them.  The  modern  concern  says,  "If  not  satisfied, 
tell  us."  No  sale  is  successful  in  the  eyes  of  the 
modem  business  man  which  does  not  pave  the  way 
for  future  sales. 

In  order  to  instill  this  spirit  into  the  minds  of  all 
who  are  connected  with  the  enterprise,  the  same 
spirit  of  honesty  and  fair  dealing  should  prevail  in 
the  internal  relations  of  the  business. 

Social  Sense.  The  business  man  should  have  a 
social  sense.  He  should  feel  that  he  is  performing  a 
social  service  and  that  he  has  social  duties.  As  a 
dealer,  he  should  be  instrumental  in  building  and 
strengthening  ethical  standards  in  the  relations  be- 
tween himself  and  his  competitors,  and  between  the 
business  men  and  the  general  public.  As  an  employer 
he  should  consider  himself  responsible  to  society  for 
the  treatment  he  gives  his  working  people,  for  the 
wages  he  pays  them,  and  for  their  health  and  general 
welfare. 

A  business  concern  which  ruins  the  health  of  its 
workers,  which  turns  them  out  into  the  world  broken 
in  body  and  spirit,  which  arouses  through  its  unfair 
dealings  a  spirit  of  revolt  and  unrest — such  a  concern 
is  a  social  menace.  From  the  point  of  view  of  society 
it  were  better  if  such  a  concern  did  not  exist.^  The 
benefits  which  society,  derives  from  its  existence  can 


BUSINESS     ORGANIZATION 


never  compensate  for  the  burdens  which  it  throws 
upon  society. 

Human  Sympathy,  A  keen  appreciation  of  social 
responsibihty  should  go  hand-in-hand  with  a  sympa- 
thetic understanding  of  man  and  his  problems. 

It  is  impossible  to  conceive  of  a  business  man  who 
deals  only  with  "things."  All  business  is  based  upon 
a  relation  of  man  to  man  in  which  the  goods  are  but 
an  incident.  In  the  factory  or  the  mine,  the  physical 
equipment,  the  raw  material,  and  the  finished  product 
are  important.  But  success  is  not  determined  by 
them,  but  primarily  by  the  spirit  of  those  who  work 
among  them. 

A  fine  factory  building,  a  well-equipped  shop,  an 
attractive-looking  store  building,  do  not  make  a  suc- 
cessful business,  any  more  than  a  few  buildings,  how- 
ever well  equipped,  make  a  school  or  a  university. 
And  just  as  it  is  the  faculty  and  the  relation  between 
the  faculty  and  the  students  which  make  a  school, 
even  if  there  is  no  building  at  all,  according  to  the 
same  principle,  it  is  the  men  and  women,  and  the 
relation  between  the  managers  and  the  workers  in 
an  organization  which  determine  its  success. 

The  ability  to  awaken  in  others  a  desire  to  co- 
operate, a  realization  of  a  community  of  interest  is  a 
rare  quality  which  is  worth  more  from  a  business 
standpoint  than  the  ability  to  design  clever  machines 
or  to  keep  l)Ooks  accurately ;  for  the  ability  to  handle 
human  problems  is  rarer  than  the  ability  to  handle 


lO  BUSINESS     ORGANIZATION 

material  problems.  May  not  this  be  the  reason  why 
an  executive  and  a  salesman  usually  receive  a  higher 
salary  than  the  man  who  designs  or  makes  the  article? 

This  may  not  seem  just  to  the  one  who  produces 
the  product.  To  him  the  product  is  the  principal 
thing.  Without  it,  so  he  says,  there  would  be  no 
salesman  and  no  executive.  The  producer,  the  work- 
er, the  designer,  therefore,  believes  himself  the  most 
essential.  But  he  forgets  that  the  matter  may  well 
be  turned  around.  If  there  were  no  salesmen  there 
would  be  no  call  for  the  product.  If  there  were  no 
executives  there  might  be  no  factory  organization. 
A  group  of  machines,  a  mob  of  workers,  and  a  pile 
of  raw  material  do  not  make  a  factory.  It  requires 
the  personality  of  a  true  executive  to  make  out  of 
this  complex  a  productive  unit.  It  requires  accurate 
knowledge  of  processes  and  of  machines,  of  market 
demands  and  of  costs.  But  most  of  all,  it  requires 
that  understanding  of  the  motives  of  men,  that 
ability  to  see  life  from  their  point  of  view  without 
which  it  is  impossible  to  establish  a  successful 
organization. 

The  day  is  past  when  labor  was  classed  along  with 
raw  material  and  equipment  as  something  bought  and 
paid  for,  and  the  control  of  which  entailed  no 
special  responsibility.  We  are  now  beginning  to 
regard  the  employer  as  directly  responsible  to  society 
for  the  moral  and  physical  welfare  of  the  human 
beings  who  place  themselves  under  his  control. 


BUSINESS     ORGANIZATION  II 

The  success  of  a  business  man  will,  in  the  future, 
no  longer  be  measured  solely  by  the  amount  of  money 
he  has  succeeded  in  accumulating,  but  will  also  be 
measured  by  the  mark  he  has  left  upon  the  lives  of 
those  with  whom  he  has  come  in  contact. 

Character.  Business  success,  therefore,  in  the  fu- 
ture more  even  than  in  the  past,  will  be  built  upon 
character.  Honesty  with  oneself  and  with  others, 
a  demand  for  the  truth  about  business  facts,  a 
sympathetic  and  fair  attitude  toward  one's  asso- 
ciates, a  sense  of  responsibility  for  one's  actions — these 
are  the  prerequisites  of  success. 

Summary,  Success  in  business  is  impossible  with- 
out knowledge  of  business  in  general,  and  of  the  kind  of 
business  in  which  one  is  engaged  in  particular.  This 
may  be  acquired  by  the  "apprenticeship"  method,  or, 
and  this  is  more  economical  in  time  and  money,  by  a 
preliminary  school  training.  This  will  shorten  the 
period  of  apprenticeship.  One  should  cultivate  the 
"scientific  attitude  of  mind";  business  men  are 
beginning  to  realize  this.  Honesty,  more  than  ever,  is 
a  business  asset — honesty  in  dealing  with  competitors, 
customers,  -^employees,  and  with  oneself.  Service 
expresses  the  true  ideal  of  business;  it  is  based  on 
social  sense  and  human  sympathy. 


12  BUSINESS     ORGANIZATION 


REFERENCES 

W.  C.  Redfield.    The  New  Industrial  Day.    The  Century 
Co. 

QUESTIONS  FOR  FURTHER  STUDY 

1.  What  is  meant  by  the  scientific  spirit  in  manage- 
ment? 

Reference:   Redfield,  Chapter  VIII. 

2.  What  are  the  benefits  which  a  business  man  may 
derive  from  a  complete  knowledge  of  costs? 

Reference:   Redfield,  Chapters  IV,  V. 

3.  What  opportunities  are  open  for  the  study  of 
business  in  your  community?  in  your  state? 

TEST  QUESTIONS 

1 .  Outline  the  steps  by  means  of  which  a  business  man 
should  reach  his  conclusions. 

2.  Explain  what  is  meant  by  service  In  business,  and 
contrast  this  new  spirit  with  the  attitude  that  used  to 
prevail.  Give  an  example  of  some  actual  experience  you 
have  had  which  illustrates  the  new  and  the  old  spirit. 

3.  What  qualities  should  a  man  possess  in  order  to 
become  a  leader  among  men? 


BUSINESS      ORGANIZATION  I3 


CHAPTER  II 

BUSINESS  ORGANIZATION 

Modern  Business  Is  Highly  Specialized.  When 
someone  says  that  he  is  "in  business,"  this  statement 
does  not  convey  a  very  definite  picture  of  what 
his  actual  occupation  is.  All  that  we  know  is  that  he 
evidently  does  not  belong  to  the  professions;  he 
does  not  teach,  preach,  plead  cases,  or  fill  teeth; 
that  much  we  know,  but  we  do  not  know  what  he 
does  do.  He  may  sell  peanuts,  write  advertisements, 
manufacture  hats,  or  build  houses. 

In  this  textbook  we  shall  study  business  in  its 
various  aspects.  Before  we  enter  upon  that  study  it 
is  necessary  that  we  begin  by  considering  somewhat 
carefully  what  we  mean  by  business.  Studying  the 
anatomy  of  a  worm  does  not  give  anyone  a  knowledge 
of  zoology.  Not  until  other  animals  have  also  been 
studied  and  the  relation  among  them  has  been 
pointed  out,  does  a  detailed  study  of  any  one  of  them 
have  any  meaning. 

It  is  the  same  with  the  study  of  business.  First, 
we  must  get  a  bird's-eye  view  of  the  various  kinds  of 
business  enterprises  and  their  relation  to  each  other, 
before  we  can  derive  any  benefit  from  a  detailed 
study  of  any  one  of  them.     The  best  method  to 


14  BUSINESS     ORGANIZATION 

follow  in  finding  one's  way  in  a  strange  city  is 
to  study  the  map  carefully  before  venturing  out. 
The  present  chapter  will  draw  a  picture  of  the 
business  world  which  will  serve  as  a  map  to  those 
who  desire  to  find  their  way  in  the  business  world. 

The  Two  Large  Classes  of  Business  Enterprises.  All 
business  enterprises  may  be  divided  into  two  large 
classes.  First,  there  are  those  which  produce  raw 
material  or  change  its  form,  possibly  combining  it 
with  other  raw  material,  and  in  that  way  producing  a 
finished  product.  Such  enterprises  are  called  indus- 
trial enterprises.  The  second  is  a  group  of  business 
activities  which  do  not  change  the  form  of  the 
products,  but  are  instrumental  in  passing  them  from 
hand  to  hand  and  from  place  to  place  until  they 
finally  reach  the  consumer.  These  are  called  com- 
mercial enterprises. 

This  division  into  two  large  groups  is  based  upon  a 
fundamental  distinction.  An  industry  changes  the 
physical  form  of  the  goods;  a  commercial  enterprise 
does  not,  though  it  may  sometimes  bring  minor 
changes  in  the  packing  and  finishing  of  the  goods. 

Industrial  Enterprises.  The  industrial  enterprises 
may  again  be  subdivided  into  two  main  groups: 
the  extractive  industries,  and  the  manufacturing 
industries.  The  extractive  industries  include  min- 
ing, forestry,  agriculture,  and  fisheries.  They 
produce  the  raw  materials  which  are  used  by  the 
manufacturing  industries.     These  extractive  indus- 


BUSINESS     ORGANIZATION  I5 

tries,  from  a  business  point  of  view,  present  interest- 
ing problems,  quite  different  from  those  connected 
with  manufacturing  industries. 

In  later  chapters  we  shall  study  the  various  factors 
which  refer  to  plant  location;  why  it  is  better  to 
locate  a  manufacturing  plant  in  one  place  rather 
than  another.  The  fact  that  it  is  necessary  to  study 
this  question  shows  that  there  is  in  the  matter  of 
location,  room  for  the  exercising  of  judgment. 

The  Extractive  Industries,  One  may  locate  a  steel 
plant  in  Seattle,  Pittsburgh,  or  Philadelphia ;  a  furni- 
ture factory  in  Grand  Rapids,  or  San  Francisco ;  but 
no  such  possibility  of  choice  exists  in  an  extractive 
industry.  In  order  to  exploit  a  mine,  to  lumber  a 
forest,  or  to  work  a  farm,  one  must  go  where  the 
mine,  the  forest,  or  the  farm  is.  The  natural  resource 
to  be  worked  predetermines  the  location  of  the  extrac- 
tive industry  based  upon  it.  This  is  not,  however, 
the  only  distinctive  feature  of  this  type  of  enterprise. 

To  a  varynig  degree,  these  industries  are  based  on 
wasting  assets;  the  larger  their  scale  of  production, 
the  more  quickly  they  put  themselves  out  of  business. 
In  a  mine  the  amount  of  ore  is  fixed ;  every  ounce  of 
ore  removed  is  removed  once  for  all,  and  the  mine 
becomes  poorer  by  that  amount.  A  forest  lumbered 
according  to  the  old-fashioned  American  method  is 
transformed  into  a  barren  waste  from  which,  if 
situated  on  a  hillside,  all  good  soil  is  washed  away 
in  a  few  years,  rendering  it  even  unsuited  to  farming. 


l6  BUSINESS     ORGANIZATION 

Every  foot  of  lumber  removed  leaves  the  country 
that  much  poorer. 

To  a  certain  extent  this  is  true  of  farming.  Many 
sections  of  the  country,  renowned  at  one  time  for  their 
fertiHty  and  great  productiveness,  are  now  yielding 
small  crops.  The  cotton  and  tobacco  fields  of  the 
South  are  not  as  good  as  they  once  were. 

The  fishery  industry  faces  a  similar  problem. 
The  destruction  of  the  spawning  grounds,  coupled 
with  the  excessive  yearly  catch,  are  rapidly  dimi- 
nishing the  fabulously  rich  fishery  resources  of 
both  the  Atlantic  and  Pacific  coasts. 

Conservation  of  Assets.  Well  managed,  extractive 
industries  take  measures  to  offset  the  effects  of  this 
decrease  in  assets.  In  the  mining  industry  such 
measures  take  the  form  of  development  and  explora- 
tion. As  the  old  mine  gradually  nears  the  point  of 
exhaustion,  new  veins  may  be  opened  up  on  the  same 
claim,  or  some  other  claim  in  another  part  of  the 
country  may  be  prepared  for  production.  Such 
measures  perpetuate  the  industry  as  a  business 
undertaking,  but  cannot  do  away  with  the  fact  that 
physical  exhaustion  is  inevitable. 

Forestry,  agriculture,  and  fisheries  are  in  a  somewhat 
different  position  since  they  deal  with  the  products 
of  the  .  vegetable  and  animal  kingdom  which,  if 
properly  cared  for,  will  replenish  themselves. 

By  a  scientific  policy  of  reforestation,  forests  may 
be  made  to  yield  lumber,  not  once,  but  indefinitely. 


BUSINESS     ORGANIZATION  I7 

The  commercial  forests  of  England,  France,  Norway, 
and  Germany,  are  eloquent  examples  of  this.  The 
wonderful  forests  of  our  great  Northwest  are  rapidly 
being  destroyed.  Bare  hills  with  blackened  stumps 
like  so  many  crosses  in  a  cemetery,  mark  the  path  of 
the  lumber  mills  that  work  their  way  further  and 
further  into  the  mountains  impoverishing  the  coun- 
try. "^  A  reforestation  policy  rigidly  enforced  upon  all 
owners  of  timber  lands  would  make  these  forests 
permanent  sources  of  wealth  to  the  nation. 

The  farming  industry  may  also  take  measures  by 
means  of  which  its  permanent  asset,  land,  may  not  only 
be  prevented  from  diminishing  in  productivity,  but 
may  actually  be  improved.  By  raising  the  same 
crops  year  after  year  land  soon  becomes  exhausted. 
Crop  rotation,  a  combination  of  dairy  or  chicken 
farming  with  the  raising  of  crops,  and  the  proper  use 
of  fertilizers  are  all  means  of  increasing  the  fertility  of 
the  soil.  The  farms  of  England,  Holland,  and  Bel- 
gium, though  cultivated  for  centuries,  are  constantly 
increasing  their  yield  per  acre.  The  farms  of  the 
United  States  are  on  the  whole  decreasing  their  yield. 
The  reason  lies  in  the  ignorance  of  the  American 
farmers  of  the  proper  methods  of  soil  conservation. 

Better  care  of  our  rivers,  scientific  propagation  of 
fish  in  Federal  and  State  hatcheries,  and  ^rigidly 
enforced  fishing  laws  may  save  the  fish  resources  of 
this  country  from  destruction.  These  matters  are  of 
national  concern  and  it  is,  therefore,  logical  that  the 


l8  BUSINESS     ORGANIZATION 

private  ownership  of  such  resources  and  the  use  that 
is  made  of  them  should  be  rigidly  controlled  by  the 
Government. 

One  other  element  enters  in  to  distinguish  the 
extractive  industries.  Their  operation  is  always 
subject  to  heavy  risks.  A  mine  may  give  out 
suddenly;  a  forest  fire  may  destroy  millions  of  dollars 
worth  of  timber;  storms  may  raise  havoc  with  the 
big  trees;  a  drought  may  destroy  all  chances  for  a 
good  crop  no  matter  how  carefully  planted  and 
cultivated;  or  a  swarm  of  locusts  may  clear  a  field 
ready  to  be  harvested. 

These  uncertainties  make  such  industries  the 
basis  of  much  speculation.  "Get-rich-quick"  schemes 
are  usually  associated  with  mines,  while  speculation 
in  food  products  is  one  of  the  most  objectionable 
kinds  of  gambling.  The  lumber  industry  is  not 
entirely  free  from  such  speculation  and  fortunes  have 
been  made  and  lost  in  the  industry. 

Manufacturing  Industries.  Manufacturing  indus- 
tries take  the  raw  materials  obtained  from  the 
extractive  industries  and  fashion  them  into  finished 
articles.  Such  industries  require  a  building  and  more 
or  less  elaborate  tools  and  machinery.  They  use, 
on  the  whole,  a  different  class  of  labor  from  the 
extractive  industries.  These  latter  need  a  large 
number  of  unskilled  laborers  of  whom  no  other 
qualification  is  asked  than  physical  strength.  A 
manufacturing  concern  needs  as  a  rule  a  large  num- 


BUSINESS     ORGANIZATION  I9 

ber  of  highly  skilled  and  intelligent  workmen. 
Extractive  industries  draw  to  themselves  an  army 
of  foreign  laborers,  many  of  them  unmarried  and 
constantly  shifting  from  one  job  to  another.  The 
manufacturing  plants  appeal  more  to  the  man  with  a 
family,  who  is  willing  to  stay  in  one  place. 

This  condition  is  emphasized  by  the  fact  that  the 
extractive  industries  are  to  a  large  extent  seasonal. 
They  are  very  active  one  part  of  the  year  and  close 
down  during  other  seasons.  This  seasonal  fluctua- 
tion increases  the  cost  of  doing  business  and  makes  it 
necessary  when  borrowing  money  to  borrow  for 
long  periods  from  season  to  season.  It  also  aggra- 
vates the  labor  question  since  it  forces  the  workmen 
to  adjust  themselves  to  intermittent  work.  Cities 
near  mining  or  lumber  camps,  or  selected  as  the 
winter  homes  of  fishermen  are  notorious  for  their 
social  instability  and  for  the  rough  and  restless  labor 
element. 

Many  manufacturing  enterprises  are  also  subject 
to  seasonal  fluctuations.  The  clothing  trade  and  the 
ice  and  coal  trade  are  of  this  nature.  Driven  by  the 
desire  to  make  complete  use  of  the  plant  throughout 
the  year  and  to  secure  a  stable,  reliable  labor  supply, 
many  of  the  seasonal  business  enterprises  are  more 
and  more  eliminating  their  seasonal  character.  They 
do  this  by  a  wise  advertising  and  selling  policy,  by 
co-operation  with  their  customers  and  with  their 
competitors.    They  may  reach  the  same  results  by 


20  BUSINESS     ORGANIZATION 


developing  a  foreign  demand  for  their  goods,  or  they 
may  undertake  to  produce  two  types  of  products 
subject  to  dovetailing  demands.  The  ice  business 
may  for  that  reason  be  profitably  combined  with  the 
coal  business. 

The  Commercial  Enterprises,  Many  business 
undertakings  of  widely  different  nature  may  all  be 
spoken  of  as  commercial  enterprises,  for  they  are 
engaged  in  facilitating  the  flow  of  products  from 
maker  to  consumer.  These  enterprises  fall  into  three 
large  classes:  (i)  marketing  or  trading,  (2)  trans- 
portation, and  (3)  financial  enterprises. 

Those  of  the  first  group  buy  products  from  a 
producer  to  sell  them  again  to  some  other  producer 
or  middleman,  or  directly  to  the  consumer;  or 
they  may  act  merely  as  agents  for  the  producers  and 
sell  on  a  commission  basis.  To  this  group  belong 
the  brokers  dealing  in  produce,  lumber,  and  metals, 
and  also  the  wholesalers,  jobbers,  and  retailers. 

The  transportation  group  consists  of  such  business 
concerns  as  railroads,  interurban  and  urban  electric 
roads,  and  inland  and  ocean  transportation  com- 
panies. 

Financial  enterpri'ses  include  banks,  trust  com- 
panies, stock  exchanges,  brokerage  firms,  and  insur- 
ance companies.  The  functions  of  the  last  two 
groups  are  easily  distinguished.  Transportation 
supplies  the  means  of  carrying  goods  from  one  place 
to  another,  whether  from  mine  to  factory  or  from 


BUSINESS     ORGANIZATION  21 

factory  to  wholesaler  or  retailer,  or  from  retailer  to 
consumer.  The  financial  enterprises,  on  the  other 
hand,  supply  in  part  at  least,  the  funds  needed  to 
enable  the  various  persons  to  buy  the  goods  they 
need,  either  for  consumption  or  for  production. 

The  Relative  Importance  of  These  Enterprises. 
Which  one  of  these  various  enterprises  is  the  most 
important?  They  are  all  essential.  Man  cannot  get 
along  without  food ;  neither  can  he  get  along  without 
shelter;  nor  can  he  raise  his  food  without  tools. 

The  manufacturing  industries,  though  producing 
many  luxuries,  have  made  the  making  of  a  living 
easier  by  supplying  man  with  more  efficient  tools. 
Transportation  facilities  carrying  goods  from  place 
to  place,  allow  the  entire  world  to  share  in  the 
products  of  the  most  favored  spots.  The  products  of 
the  tropics  are  found  in  the  remotest  comers  of  the 
globe,  while  the  manufactured  products,  the  lumber, 
and  the  wheat  of  the  temperate  zones  are  common 
necessities  in  tropical  lands. 

Without  the  aid  of  the  various  traders  such  wide 
distribution  of  goods  would  not  be  possible.  The 
middlemen,  so  often  accused  of  all  the  evils  in  the 
dictionary,  perform  a  necessary  service.  The  retailer 
who  keeps  within  convenient  distance  from  every 
home  a  well-selected  stock  of  goods,  contributes  no 
little  to  the  comforts  of  life.  Who,  indeed,  would 
care  to  return  to  frontier  conditions  when  once  a 
year  the  supplies  for  the  family  were  bought  and 


22  BUSINESS     ORGANIZATION 

stored  away?  All  these  enterprises  are,  therefore, 
essential  and  socially  valuable,  but  only  so  long  as 
they  are  conducted  efficiently  and  honestly. 

Efficiency  a  Social  Duty,  From  a  purely  selfish 
standpoint,  middlemen  may  look  upon  an  increase 
of  their  number  in  the  path  that  connects  producer 
and  consumer,  as  a  good  thing.  It  means  great 
profits.  From  the  point  of  view  of  society  at  large, 
an  unnecessary  multiplication  of  middlemen  is  bad; 
for  all  inefficiency  is  a  social  loss.  If  more  men  are 
engaged  in  loading  a  ship,  in  cutting  down  a  tree,  in 
selling  groceries,  or  in  directing  the  money  resources 
of  the  community  than  are  absolutely  necessary, 
the  total  productivity  of  society  is,  by  that  much, 
less  than  its  maximum.  Ultimately  every  member  of 
society  suffers  by  inefficiency,  for  if  many  men 
are  engaged  unproductively,  there  are  just  as  many 
mouths  to  feed,  just  as  many  human  wants  to 
satisfy,  but  less  goods  to  go  around  than  when  the 
same  men  are  engaged  in  productive  work. 

This  consideration  may  change  somewhat  our  at- 
titude toward  the  successful  business  man.  The 
small,  inefficient  business  man  is  frequently  looked 
upon  with  sympathy  as  entitled  to  our  aid  and  sup- 
port, while  the  big,  successful  man  is  at  times 
thought  to  have  made  his  income  at  the  expense  of 
society.  Frequently,  however,  the  situation  is  quite 
the  reverse.  The  poor  business  man — or,  as  the 
economist  would  call  him,  "the  marginal  man" — is 


BUSINESS     ORGANIZATION  23 

the  culprit.  His  inefficiency  means  an  increased  cost 
to  everybody  concerned  and  an  increased  profit  to 
the  efficient.  The  poor  business  man  throws  bur- 
dens upon  the  banks  and  the  insurance  companies; 
he  is  frequently  responsible  for  congested  freight  ter- 
minals and  for  labor  unrest.  The  instability  of  his 
business  endangers  all  other  business  in  the  same  way 
as  a  bad  fire  risk  endangers  all  other  buildings  in  the 
same  block. 

Efficiency  in  business,  therefore,  is  a  matter,  not  of 
purely  individual  interest,  but  of  social  concern.  The 
greater  the  efficiency  of  the  link  connecting  nature 
and  consumer,  the  more  human  wants  may  be  satis- 
fied with  the  same  work  and  capital. 

In  the  pages  that  follow,  various  factors  affecting 
the  efficiency  of  business  enterprises  will  be  discussed. 
The  discussion  will  frequently  be  technical  and  de- 
tailed, for  no  useful  information  can  ever  be  im- 
parted in  mere  generalities.  However  much  the 
question  under  discussion  may  seem  to  be  of  impor- 
tance only  to  the  pocketbook  of  the  individual 
business  man,  it  should  at  all  times  be  remembered 
that  individual  efficiency  and  productivity  are  of 
direct  and  intimate  concern  to  society  as  a  whole. 
The  consumer  is  as  much  interested  in  the  installa- 
tion of  good  accounting  systems  as  the  business  man 
and  his  employees,  while  a  lower  selling  or  transpor- 
tation cost  is  of  equal  importance  to  producer, 
middleman,   and    consumer.      There    is,    therefore, 


24  BUSINESS     ORGANIZATION 

nothing  dismal  or  materialistic  in  a  study  of  business 
problems.  It  is,  in  fact,  a  study  of  the  practical 
means  of  increasing  human  happiness. 

Business  Analyzed  According  to  Functions,  We 
have  discussed  the  various  business  enterprises  and 
grouped  them  according  to  types.  Within  each  of 
these  types  many  men  are  at  work  in  charge  of  a 
large  variety  of  functions.  There  is  a  great  similarity 
between  the  functions  necessary  to  operate  widely 
differing  types  of  enterprises.  In  the  first  place,  a 
line  may  be  drawn  between  ownership  and  operation. 
In  a  more  primitive  organization  of  society,  these 
functions  were  combined  in  one  man,  and  a  business 
was  operated  by  its  owner  with  the  aid  of  clerks  and 
workmen.  As  the  business  unit  grew,  it  became 
necessary  to  look  for  funds  outside.  Many  people 
who  have  surplus  funds  are  willing  to  use  them  pro- 
ductively, but  frequently  cannot  spare  the  time  or 
do  not  possess  the  ability  to  actively  engage  in  the 
operation  of  the  concern  themselves. 

The  growth  of  the  corporate  type  of  organization 
has  made  it  possible  for  anyone  with  funds  to  invest 
in  many  business  enterprises.  But  this  investment 
does  not  carry  with  it  the  burden  of  operation.  In 
modem  business,  ownership  and  operation  are,  there- 
fore, quite  distinct.  The  owners  exercise  direct  con- 
trol over  the  finances  of  the  enterprise  and  direct  the 
general  policy,  but  the  operation  is  placed  in  the 
hands  of  a  different  group  of  persons. 


BUSINESS     ORGANIZATION  25 

In  this  group  we  may  recognize  three  large  sub- 
divisions: management,  administration,  and  labor. 
The  functions  of  the  management  are  to  plan  all 
processes  of  operation  and  to  direct  the  execution  of 
the  plan.  The  labor  force,  whether  in  the  office  or 
the  shop,  receives  the  instructions  and  orders  from 
the  managers  and  is  expected  to  carry  them  out. 
The  administrative  force  acts  as  a  link  between  the 
managers  and  the  shop  or  office;  first,  in  making  a 
record  of  the  orders  issued;  second,  in  keeping  a  rec- 
ord of  results ;  and  third,  by  tabulating  this  informa- 
tion in  accounting  or  statistical  form  for  the  use  of 
the  managers. 

In  few  business  concerns  are  management,  admin- 
istration, and  execution  as  sharply  separated  as  the 
foregoing  description  might  indicate.  There  is,  how- 
ever, a  general  tendency  throughout  the  business 
world  to  carry  through  this  fundamental  division 
more  clearly  than  formerly. 

Departmental  Division.  Still  another  subdivision 
usually  takes  place  according  to  the  various  depart- 
ments of  activity  which  jointly  constitute  the  "opera- 
tion" of  the  enterprise.  In  the  manufacturing  busi- 
ness this  subdivision  would  logically  result  in  the 
following  departments  : 

I .  Purchasing.  Here  is  concentrated  the  buying  of  raw 
material;  partly  finished  goods  and  parts;  supplies  for 
the  shop,  such  as  oil  and  waste;  supplies  for  the  office, 
such  as  typewriter  ribbons,  paper,  glue,  and  paper  clips; 


26  BUSINESS     ORGANIZATION 

equipment,  such  as  machinery,  office  fixtures,  and  small 
tools. 

2.  Service.  This  department  hires  the  workmen, 
selects  them,  assigns  them  to  their  jobs,  trains  them  for 
their  work,  supervises  their  efficiency,  and  transfers 
them  to  other  work  if  this  proves  desirable.  It  cares  for 
the  comfort  and  physical  and  spiritual  welfare  of  the 
workers. 

3.  Production.  In  this  department  the  product  is 
made.  Usually  this  department  is  subdivided  into  at 
least  the  following  subdepartments :  engineering  or 
drafting  department;  and  the  shop  with  its  many 
subdivisions  such  as  storerooms  of  raw  material,  finished 
stock  rooms,  tool  rooms,  power  plant,  and  the  shop  proper. 

4.  Selling.  This  again  may  be  subdivided  into:  ad- 
vertising, selling,  correspondence,  delivery,  and  other 
subdepartments. 

5.  Accounting.  Here  the  records  are  kept  of  the  fi- 
nancial relations  of  the  firm  with  the  outside  world  and 
with  its  own  employees,  and  records  from  which  the 
cost  of  production  of  the  goods  and  the  efficiency  of 
various  departments  and  persons  may  be  determined. 

Organization  Charts.  The  human  mind  has  diffi- 
culty in  grasping  abstract  statements.  For  this  rea- 
son, more  and  more  general  use  is  made  in  business 
of  charts  and  graphs.  There  is  usually  connected 
with  the  accounting  department  a  department 
charged  with  the  duty  of  collecting  data  regarding 
operation  and  administration,  and  of  presenting 
them  in  such  a  form  that  the  conclusions  to  which 


BUSINESS     ORGANIZATION  2/ 

they  point  may  be  quickly  grasped.  This  is  called 
the  statistical  department.  One  of  its  functions  is  to 
present  monthly,  weekly,  or  even  daily  charts,  show- 
ing in  pictures  the  facts  of  interest  to  the  different 
managers  or  executives.  To  give  an  example:  In 
case  the  manager  for  whom  the  graph  is  being  pre- 
pared is  primarily  interested  in  selling,  many  such 
pictures  may  be  drawn ;  one  to  show  the  total  sales 
of  the  department  day  by  day;  another  to  show  the 
daily  records  of  individual  salesmen ;  and  another  to 
give  the  relation  between  certain  advertisements  and 
the  sales  that  took  place  as  a  result.  So  each  depart- 
ment gives  rise  to  many  such  data  which  may  form 
the  material  for  graphical  representation.  To  illus- 
trate how  much  more  easy  it  is  to  grasp  a  picture 
than  to  understand  figures,  compare  the  following: 


M 

T 

W 

TH 

F 

S 


Production  during  the  week  ending  June  25th  0! 

No.  A  3  spools 

M  T  W  Th  F  S 

606    575    585    310    450   610 


28  BUSINESS     ORGANIZATION 

From  the  above  chart  it  is  immediately  clear  that 
something  happened  on  Thursday,  possibly  a  break- 
down at  the  end  of  the  day. 

This  statistical  department  is  also  charged  with 
the  duty  of  preparing  organization  charts.  These 
charts  have  several  purposes.  They  show  in  a  clear 
picture  the  departments  of  which  the  organization 
consists,  their  functions,  their  interrelations,  and  the 
flow  of  authority.  In  many  large  concerns  such 
charts  are  kept  either  on  the  walls  of  all  offices  or 
under  a  glass  plate  upon  the  desks  of  executives  and 
departmental  managers.  Two  such  organization 
charts  are  given  below. 

Besides  satisfying  the  purposes  indicated  below, 
such  charts  may  also  be  a  source  of  inspiration  to  the 
younger  members  of  the  organization.  They  see  the 
steps  by  which  they  may  climb  into  the  better  posi- 
tions. One  good  way  to  attain  success  is  to  prepare 
oneself  constantly  for  the  "job  ahead."  No  matter 
how  far  we  progress  in  life,  there  is  always  some  better 
position  ahead.  By  preparing  conscientiously  for  the 
position,  the  day's  work  seems  more  worth  while;  it 
becomes  a  stepping-stone  to  something  better.  Our 
widened  horizon  makes  us  see  our  position  as  the  man 
above  is  seeing  us. 

Many  large  industrial  corporations  make  it  a 
definite  policy  to  require  of  each  man  that  he  train 
some  other  employee  to  be  his  "understudy."  This 
accomplishes  a  variety  of  beneficial  results.     The 


BUSINESS     ORGANIZATION 


29 


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30 


BUSINESS     ORGANIZATION 


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BUSINESS     ORGANIZATION  3I 

younger  man  realizes  that  he  is  in  line  for  promotion 
and  this  encourages  him  and  gives  him  enthusiasm 
in  his  work.  The  higher  employee  no  longer  feels 
himself  indispensable  and  begins  to  look  to  the  job 
ahead  of  him.  Enthusiasm  and  alertness  in  this  way 
communicate  themselves  to  the  entire  organization. 
Moreover,  should  some  employee  resign  or  fall  sick 
there  would  be  no  difficulty  in  filling  his  place.  .  The 
National  Cash  Register  Company  attributes  a  large 
part  of  its  esprit  de  corps  to  this  policy  of  training 
understudies.  In  order  to  aid  employees  in  obtaining 
this  vision,  some  firms  prepare  promotion  charts, 
showing  in  a  simple  way  the  steps  by  which  it  is 
possible  to  climb  to  higher  positions. 

Lord  and  Taylor,  a  large  department  store  in  New 
York  City,  has  prepared  the  following  chart: 

I     pCSIGNtR~|  I        SALES    ~]  1  BOOKKEEPErI 

I       MILLINER  ~1         I   DRESSMAKETI  IJUNIOR  SALESI  ISTENOGRAPHER]        I      BILLCLCRlTI 

\  apprentice!  \       PACKER  ~|  j       TYPIST    ~) 

j  WORK  ROOM  I  I        STOCK    ~|  I  OmCE  GIRlI 


I   CHECKGIRL    I 


PROMOTION  CHART  OF  A  LARGE  DEPARTMENT  STORE 


In  the  pages  that  follow  the  questions  hinted  at  in 
the  present  chapter  will  be  discussed  in  more  detail. 

Summary.  There  are  two  classes  of  business  en- 
terprises, industrial  and  commercial.  The  industrial 
enterprises  change  the  form  of  goods,  while  the  com- 
mercial enterprises  facilitate  exchange  and  produc- 


32  BUSINESS     ORGANIZATION 

tion.  Industrial  enterprises  may  again  be  divided 
into  manufacturing  and  extractive  industries,  each 
with  its  own  characteristics.  Commercial  enter- 
prises may  be  trading,  transportation,  or  financial 
undertakings. 

Within  each  business  three  main  functions  may  be 
recognized :  management,  administration,  and  labor. 
The  following  departmental  divisions  are  frequently 
found:  purchasing,  service,  production,  selling,  and 
accounting.  Organization  charts  are  used  to  enable 
the  members  of  the  organization  to  understand  their 
relation  to  the  organization  as  a  whole. 


BUSINESS     ORGANIZATION  33 

REFERENCES 

H.  C.  Adams.    Description  of  Industry,    Henry  Holt  and 
Company. 

C.  C.  Parsons.    Business  Administration,    A.  W.  Shaw 
Company. 

J.   R.   Smith.     Industrial  and   Commercial  Geography, 
Henry  Holt  and  Company. 

QUESTIONS  FOR  FURTHER  STUDY 

1 .  What  does  Smith  mean  when  he  says :  "Civilization 
is  a  product  of  adversity"? 

Reference:  Smith.    Chapter  I. 

2.  Explain  the  difference  between  "money  crops"  and 
"supply  crops." 

Reference:  Smith.    Chapter  H, 

3.  Show  by  examples  how  the  application  of  science 
to  agriculture  has  changed  methods  and  crops. 

Reference:  Smith.    Chapter  XVH. 

4.  What  is  the  position  of  an  auditor,  and  in  how  far 
do  his  duties  differ  from  those  of  a  controller? 

Reference:      Parsons.       Business    Administration. 
Chapter  H. 

5.  In  what  respects  does  the  classification  of  industries 
given  by  Adams  differ  from  the  one  given  in  this  chapter? 

Reference:   Adams.    Chapter  H. 

6.  What,  according  to  Adams,  are  the  marks  of  a 
successful  industrial  organization? 

Reference:   Adams.    Chapter  VH. 


34  BUSINESS     ORGANIZATION 

TEST  QUESTIONS 

1.  Give  a  definition  of  extractive  industry,  manu- 
facturing industry,  commercial  enterprise.  Give  two 
examples  of  each  type  of  enterprise. 

2.  What  problems  of  labor  and  financial  management 
are  characteristic  of  the  extractive  industries? 

3.  Are  these  problems  entirely  absent  from  the  manu- 
Jacturing   industries    and    the   commercial   enterprises? 

4.  Explain  why  individual  efficiency  is  a  social  duty. 


BUSINESS     ORGANIZATION  35 


CHAPTER   III 

THE  PROPRIETORSHIP  OF  A  BUSINESS 

The  Owners  May  Be  One  or  Many,  Where  a  man 
owns  his  business,  as  a  great  many  of  the  small  busi- 
ness men  do,  we  speak  of  "single  ownership,"  or  "sole 
proprietorship."  A  few  of  the  large  and  nationally 
known  concerns  are  also  of  this  type.  John  Wana- 
maker  continued  to  be  the  sole  proprietor  and  mana- 
ger of  his  large  department  stores  until  a  few  years 
ago,  when  he  changed  the  form  of  ownership. 

The  advantage  of  this  kind  of  ownership  is  that 
the  owner  receives  all  the  profits  which  are  made,  but 
this  is  offset  by  the  consideration  that  he  must  also 
bear  all  losses.  Legally,  he  is  responsible  with  all  that 
he  possesses — whether  invested  in  his  business  or  not 
— for  all  debts  contracted,  either  private  or  on  ac- 
count of  his  business.  Another  drawback  of  sole 
proprietorship  is  that  the  growth  of  the  business  is 
often  limited  by  the  amount  which  the  owner  is  able 
to  invest.  Except  where  the  business  prospers  to  an 
unusual  degree,  and  where  the  owner  is  willing  to 
leave  a  large  portion  of  these  profits  in  the  business — 
thereby  increasing  his  investment  year  by  year — 
single  proprietorship  may  seriously  hamper  growth. 
At    best,    reinvesting    earnings  is  a  slow    prooess 


36  BUSINESS     ORGANIZATION 

and  may  often  be  too  slow  to  allow  normal  develop- 
ment to  take  place. 

In  order  to  obtain  additional  capital  so  that  the 
enterprise  may  expand,  the  proprietor  may  take  in 
one  or  more  partners.  The  basis  upon  which  he  will 
take  in  these  coproprietors  will  depend  upon  the 
agreement  he  is  willing  to  make.  A  contract  will  be 
drawn  up  in  which  the  amount  which  each  is  to  in- 
vest in  the  partnership,  the  form  of  this  investment, 
whether  cash,  goods,  or  good  will,  the  way  in  which 
profits  and  losses  are  to  be  divided,  are  carefully 
stated.  Usually  there  is  also  a  clause  dealing  in  detail 
with  the  exact  method  according  to  which  the  part- 
nership may  be  dissolved.  It  is  easy  to  see  that 
taking  in  partners  is  a  serious  business  which  should 
not  be  done  without  careful  consideration.  All  part- 
ners, except  those  who  have  been  declared  "dormant" 
or  "non-acting,"  have  a  right  to  control  the  affairs  of 
the  concern,  and  are  legally  empowered  to  bind  the 
partnership  by  their  contracts. 

In  selecting  partners  it  is,  therefore,  necessary  to 
find  not  only  someone  with  the  necessary  amount  of 
cash,  but  also  someone  who  commands  the  entire 
confidence  of  the  owner.  It  is  bad  enough  to  be  held 
responsible  with  all  that  one  possesses  for  debts  con- 
tracted in  the  pursuit  of  one's  business,  as  in  the 
single  proprietorship,  but  it  is  worse  to  be  held  re- 
sponsible for  the  debts  contracted  for  the  under- 
taking by  all  other  partners.    This  "unlimited  liabil- 


BUSINESS     ORGANIZATION  37 

ity"  is  a  serious  drawback  to  the  partnership.  An- 
other objection  is  that  death  or  insanity  or  even  vol- 
untary withdrawal  may  disband  the  partnership, 
thereby  leaving  the  original  owner  high  and  dry, 
frequently  unable  to  carry  on  his  business  alone  and 
unable  to  find  another  partner.  Where  a  large 
amount  of  capital  is  needed,  a  correspondingly  large 
number  of  partners  would  have  to  be  taken  in, 
thereby  increasing  the  dangers  and  difficulties  men- 
tioned. 

The  Corporation,  The  corporation  presents  itself 
as  a  fonn  of  ownership  which,  has  all  the  advantages 
of  a  partnership,  and  few  of  its  disadvantages.  A 
partnership  is  a  contract  between  persons,  but  this 
personal  element  disappears  in  the  corporation, 
which  is  an  artificial  person  created  by  law.  In  most 
states,  corporations  may  be  created  under  the  "gen- 
eral corporation  law"  of  the  state  by  fulfilling  the 
requirements  of  the  law  and  by  filing  the  necessary 
papers  with  the  proper  state  officials,  usually  the 
Secretary  of  State.  If  all  conditions  have  been  ful- 
filled, a  "charter"  or  "articles  of  incorporation"  are 
issued. 

The  capital  of  a  corporation,  corresponding  to  the 
net  investment  of  the  single  partnership  or  proprie- 
torship, is  once  for  all  fixed  and  cannot  be  changed 
without  sanction  from  the  same  state  officials.  For  the 
sake  of  convenience,  the  total  capital  is  divided  into 
shares  of  equal  amounts.    These  are  called  shares  or 


38  BUSINESS     ORGANIZATION 

shares  of  stock.  Those  who  contribute  to  the  capi- 
tal are  called  stockholders  or  shareholders.  The 
stockholders  are,  therefore,  the  owners  of  a  corpora- 
tion in  the  same  sense  as  partners  are  the  owners  of  a 
partnership. 

In  most  states  at  least  three  incorporators  are  re- 
quired before  a  corporation  can  be  formed.  They 
must  have  agreed  to  take  a  certain  percentage  of  the 
total, capital  stock — this  is  called  subscribing  to  the 
stock — ^and  before  business  can  be  begun  a  certain 
percentage  of  their  subscription  must  be  paid  into 
the  treasury  of  the  corrjpany.  In  applying  for  incor- 
poration the  following  information  must,  as  a  rule, 
be  submitted: 
i.^The  name  and  purpose  of  the  organization. 

2.  The  amount  of  capital  and  classes  of  stock  to  be  issued. 

3.  The  location  of  the  main  business  office. 

4.  The  expected  life  of  the  corporation — as  a  rule  a  cor- 

poration has  perpetual  life. 

5.  The  names  and  addresses  of  the  incorporators. 

Advantages  of  Incorporation,  One  of  the  principal 
advantages  of  the  corporation  is  found  in  the  limited 
liability  of  its  shareholders.  Usually  their  liability  is 
limited  to  the  amount  which  they  have  invested, 
though  in  rare  cases,  as  in  the  case  of  banks,  "double 
liability,"  i.  e.,  liability  for  twice  that  amount  is 
found.  This  limited  liability  feature  is  one  of  the 
reasons  why  state  regulation  is  needed.  The  inter- 
ests of  the  creditors  must  be  given  some  degree  of 


BUSINESS     ORGANIZATION  39 

protection,  though  it  may  curtail  the  freedom  of  ac- 
tion on  the  part  of  the  owners. 

The  fact  that  such  corporations  may  have  a  per- 
petual life,  and  that  their  existence  is  not  affected  by 
changes  in  the  body  of  owners  is  another  important 
advantage  over  the  partnership,  the  life  of  which  is 
always  more  or  less  uncertain.  The  stockholders  or 
shareholders,  though  dividing  the  ownership  of  the 
undertaking,  have  no  right  to  act  as  agents  for  the 
corporation  unless  duly  appointed  to  such  office. 
This  protects  against  recklessness  or  lack  of  business 
knowledge  on  the  part  of  a  joint  owner,  a  danger 
which  is  very  real  in  the  case  of  a  partnership. 

All  that  a  stockholder  is  expected  to  do  is  to  supply 
funds,  to  cast  his  vote  at  the  stockholders'  meetings, 
and  to  take  the  profits,  if  any,  while  in  case  of  loss  he 
knows  that  he  cannot  lose  more  than  he  invested.  A 
corporation  may,  therefore,  look  for  its  shareholders 
among  people  of  all  kinds  ,•  the  possession  of  a  certain 
amount  of  cash  is  the  only  necessary  condition  of 
membership.  The  fact  that  losses  are  limited  to  a 
known  amount  makes  the  finding  of  persons  able  and 
willing  to  become  part  owners  of  a  new  enterprise 
comparatively  easy. 

To  sum  up  the  advantages  of  incorporation — they 
are  found  principally  in : 

1.  Limited  liability. 

2.  Separation  of  ownership  and  management. 

3.  Life  independent  of  changes  of  ownership. 


40  BUSINESS     ORGANIZATION 

Launching  a  Corporation.  Until  the  incorporation 
is  completed  the  incorporators  are  "jointly  and  sev- 
erally" liable  for  all  debts  contracted  by  them  for  the 
undertaking.  A  considerable  amount  of  business 
may  have  to  be  transacted  before  incorporation  can 
be  started.  It  may  be  necessary  to  pay  down  money 
to  secure  patent  rights  or  mining  claims  or  to  secure 
options  for  later  purchases.  Lawyers  may  have  to 
be  engaged  to  advise  in  respect  to  legal  complications 
which  are  likely  to  arise  in  connection  with  such 
ownership  and  rights.  These  and  a  multitude  of 
other  details  must  be  attended  to  before  it  is  possible 
to  incorporate. 

It  is  not  an  easy  matter,  therefore,  to  launch  a  cor- 
poration. Few  people  know  how  to  go  about  it,  and 
still  fewer  are  willing  to  face  the  risks  involved.  The 
making  of  all  preparations  and  the  finding  of  the 
initial  finances  is  called  promotion,  and  the  men  un- 
dertaking it  are  called  promoters.  Some  individuals, 
usually  men  with  experience  in  finance  and  a  knowl- 
edge of  the  financial  world,  make  a  specialty  of  pro- 
motion. They  are  professional  promoters.  Some  of 
these  promoters  have  incorporated  their  business  and 
have  added  a  staff  of  engineers.  By  so  doing  they 
are  able  to  give  expert  advice  concerning  the  feasi- 
bility of  engineering  projects,  and  to  undertake  the 
construction  and  initial  operation  of  such  propositions. 

Sometimes  a  group  of  bankers  forms  a  syndicate^ 
which  is  a  kind  of  temporary  partnership  for  the  pur- 


BUSINESS     ORGANIZATION  41 

pose  of  investigating,  organizing,  and  starting  a  new 
corporate  enterprise.  The  promoters  are  usually  re- 
warded by  being  made  shareholders  of  the  new  cor- 
poration. In  other  words,  they  are  given  a  block  of 
stock  or  are  allowed  to  purchase  it  at  a  low  figure. 

The  Value  of  Stock,  Each  stock-  or  shareholder 
receives  as  evidence  of  his  part  ownership  a  stock  cer- 
tificate. In  this  stock  certificate  is  stated  the  number 
of  shares  of  stock  which  it  represents.  The  par  value 
of  the  stock  is  also  indicated.  By  par  value  is  meant 
the  sum  which  represents  the  proportionate  amount 
of  the  total  capital  which  the  share  represents.  If 
the  total  capitalization  is  $100,000  and  one  thousand 
shares  have  been  issued,  then  each  share  is  said  to 
have  a  par  value  of  $100.  Whether  it  is  worth  $100  is 
another  question.  The  value  of  the  shares  is  deter- 
mined not  by  their  par  value,  but  by  the  actual  or 
expected  earnings  of  the  corporation  and  by  the  pro- 
portion of  these  earnings  which  will  fall  to  each 
share.  The  larger  the  number  of  owners,  the  smaller 
the  share  which  each  one  will  receive. 

Different  Classes  of  Stock.  There  is  still  another 
factor  which  influences  the  value  of  shares  of  stock. 
Each  share  of  stock  has  three  important  rights. 
These  are : 

1 .  A  vote  in  the  election  of  the  directors  of  the  company. 

2.  A  share  in  such  part  of  the  profits  as  the  directors 

have  declared  can  safely  be  distributed. 


42  BUSINESS     ORGANIZATION 

3.   A  share  of  the  total  net  assets  of  the  corporation  in 
case  of  dissolution. 

As  long  as  all  shares  are  on  the  same  basis  and  none 
have  special  rights,  all  shares  of  stock  will  have  the 
same  value,  but  sometimes  there  exist  different  kinds 
of  stock.  Certain  shares  have  privileges  and  rights 
which  are  not  given  to  the  ordinary  or  common  stock. 
Stock  with  special  privileges  is  called  preferred  stock. 

Preferred  Stock.  How  It  Arises.  Why  should  such 
special  privileges  be  given?  Because  under  certain 
circumstances  this  may  be  the  only  way  of  saving  the 
company  from  ruin.  Suppose  that  a  company  has 
been  operating  for  some  time  and  is  desperately  in 
need  of  more  capital.  It  is  found  impossible  to 
"float,"  i.  e.,  sell  more  common  stock.  The  directors 
do  not  judge  it  expedient  to  borrow  money  for  the 
undertaking,  for  that  would  mean  shouldering  a 
heavy  responsibility  for  the  regular  payment  of  in- 
terest. Preferred  stock  opens  the  way  to  meet  this 
difhcult  situation.  It  means  taking  in  more  co- 
owners,  and  it  means  granting  them  rights  which  the 
original  owners  do  not  possess.  It  means  a  sacrifice 
of  rights  on  the  part  of  the  original  owners,  but  it  is 
a  necessary  sacrifice.  Money  must  be  secured  and 
cannot  be  secured  in  any  other  way. 

Or  it  may  be  that  the  company  has  borrowed 
money  in  the  past  and  has  difficulty  in  meeting  its 
obligations.     The  creditors  may  have  been  given 


BUSINESS     ORGANIZATION  43 

rights  when  the  debt  was  contracted,  which  might 
make  it  uncomfortable  for  the  company.  This  is 
usually  the  case  where  bonds  have  been  issued.  These 
will  be  discussed  in  a  later  chapter,  but  at  this  place 
it  may  be  explained  that  bondholders  are  long-time 
creditors  of  a  company  who  usually  have  the  right  to 
take  possession  of  the  property  and  to  operate  it  for 
their  benefit,  or  to  sell  it  and  to  apply  the  proceeds  on 
the  debt,  whenever  the  company  fails  to  pay  either 
interest  or  principal  at  the  agreed  time.  Should  the 
company  fail  to  live  up  to  its  obligations,  the  bond- 
holders may  take  steps  to  exert  their  rights. 

In  such  cases  preferred  stock  forms  a  compromise. 
The  original  owners  sacrifice  rights  and  the  old  bond- 
holders sacrifice  some  of  their  rights  to  become  privi- 
leged part-owners  rather  than  wreck  the  concern  by 
insisting  upon  exercising  their  full  legal  rights.  Pre- 
ferred stock  may  also  arise  as  a  result  of  the  desire  to 
give  old  part-owners  who  have  invested  different 
amounts  in  cash  an  equal  voting  power  in  the  man- 
agement of  the  corporation. 

Different  Kinds  of  Preferred  Stock.  Almost  all  pre- 
ferred stock  is  preferred  as  to  dividends,  i.  e.,  in  re- 
spect to  the  profits  to  be  divided.  There  is  an  almost 
unlimited  number  of  ways  in  which  this  special  privi- 
lege may  be  granted.  The  agreement  may  be  that 
no  dividends  are  to  be  paid  to  the  common  until  the 
preferred  has  received  a  certain  amount,  say  6  per 
cent,  after  which  all  may  share  equally  or  in  some 


44  BUSINESS     ORGANIZATION 

Other  way  agreed  upon.  As  an  example  may  be  given 
the  preferred  stock  of  the  Chicago  and  Northwestern 
Railway.  This  stock  draws  7  per  cent  which  is  fol- 
lowed by  7  per  cent  on  the  common.  After  this  the 
preferred  draws  another  3  per  cent  before  the  com- 
mon draws  anything  further. 

In  some  cases  preferred  stock  is  cumulative;  this 
means  that  a  minimum  of  yearly  dividends  is  guar- 
I  an  teed.  If  during  any  one  year  no  dividends  are 
paid,  they  must  be  paid  at  some  later  time  before 
the  common  stockholders  can  receive  any  share  in 
the  profits.  This  may  be  an  agreeable  arrangement 
for  the  preferred  stockholders,  but  it  is  easy  to  see 
how  this  affects  the  common  stockholders.  They 
may  have  to  go  without  income  for  years  and  years. 
As  far  as  they  are  concerned  this  arrangement  is  al- 
most, though  not  quite,  as  bad  as  borrowing  money 
and  facing  the  heavy  yearly  interest  burden. 

The  situation  grows  worse  when  preferred  stock- 
holders are  granted  additional  voting  privileges. 
This  is  frequently  the  case,  and  it  is  not  uncommon 
for  the  control  of  the  corporation  to  pass  practically 
into  the  hands  of  the  preferred  stockholders.  Some- 
times provision  is  made  by  which  control  passes  into 
their  hands  automatically,  as  soon  as  dividends  have 
not  been  paid  for  a  certain  number  of  years,  say  four 
or  five  years,  in  succession. 

Preferred  stock  may  also  have  special  rights  in  re- 
spect to  the  final  division  of  the  property  in  case  of 


BUSINESS     ORGANIZATION  45 

dissolution  or — ^and  this  is  becoming  more  and  more 
common — an  additional  inducement  may  be  held  out 
in  the  privilege  of  exchsmging  the  preferred  for  com- 
mon stock,  in  which  case  a  share  of  preferred  may  be 
considered  the  equivalent  of  one  and  a  half  or  even 
two  shares  of  common. 

The  Control  of  the  Corporation.  All  stocks  have,  as 
a  rule,  the  right  of  vote  in  the  stockholders'  meeting. 
All  internal  affairs  are  usually  regulated  by  a  set  of 
by-laws  which  supplements  a  charter  or  constitution. 
In  these  by-laws  the  following  matters  are  included: 

1.  Time,  place,  and  manner  of  calling  and  conducting 

stockholders'  meetings. 

2.  The   number   of   stockholders   which   constitutes   a 

quorum. 

3.  The  manner  in  which  absent  stockholders  may  cast 

their  votes.    This  is  called  voting  by  proxy. 

4.  The  method  of  electing  directors,  their  duties,  and 

qualifications. 

5.  The  method  of  appointing  the  officers,  their  dutljes, 

and  qualifications. 

6.  The  salaries  and  other  methods  of  compensation  of 

directors  and  officers. 

The  stockholders  elect  a  board  of  directors.  The 
duties  of  the  directors  are  to  appoint  competent 
officers,  to  direct  the  general  policy  of  the  corpora- 
tion, and  to  examine  the  periodic  statements  sub- 
mitted to  them  in  order  to  inform  themselves  in 
regard  to  the  honesty  and  efficiency  of  the  managers. 


46  BUSINESS     ORGANIZATION 

In  this  country,  directors  are  seldom  paid  for  their 
services  except  by  a  nominal  fee  for  expenses.  In 
other  countries  directors  receive  a  percentage  of  the 
profits  and  they  are,  therefore,  more  vitally  interested 
in  the  success  of  the  concern  even  though  they  may 
hold  only  small  amounts  of  stock. 

The  only  way  in  which  a  stockholder  can  control 
the  management  of  an  undertaking  of  which  he  is  a 
part-owner,  is  by  casting  his  vote  in  a  general  stock- 
holders' meeting  for  those  directors  who,  he  believes, 
will  best  look  after  his  interests.  But  one  stock- 
holder can  do  very  little  unless  he  has  a  very  large 
amount  of  stock,  and  even  then  he  can  do  very  little 
unless  in  some  way  he  succeeds  in  getting  a  majority 
vote  in  the  meeting.  This  does  not  necessarily  mean 
51  per  cent  of  the  total  shares  issued;  much  less  than 
that  is  sufficient  as  a  rule,  for  the  stock  is  frequently 
held  by  widely  scattered  owners  who  never  even  con- 
sider attending  a  meeting.  And  even  if  they  did 
attend,  the  fact  that  they  do  not  "pull  together" 
makes  it  possible  for  any  small  and  well-organized 
group  with  a  comparatively  small  amount  of  stock  to 
dominate. 

Frequently  a  group  of  financiers  control  the  vote 
not  only  by  means  of  their  own  holdings,  but  also  by 
means  of  the  proxies  of  absent  voters.  A  proxy  is  a 
document  by  means  of  which  the  stockholder  author- 
izes someone  else  to  vote  for  htm. 


BUSINESS     ORGANIZATION  47 

The  Payment  of  Stock.  As  will  be  remembered,  the 
stockholders  who  agreed  to  buy  stock  when  the  com- 
pany was  first  started  were  said  to  subscribe  to  this 
stock  and  are  consequently  called  subscribers. 

Since  the  company  is  not  permitted  by  law  to  begin 
operation  before  at  least  a  certain  percentage  of  the 
amount  subscribed  has  been  paid  in,  the  stockholders 
must  make  this  initial  payment  before  the  concern 
begins  to  be  a  "going  concern." 

The  board  of  directors  may  d'ecide — if  the  by-laws 
do  not  compel  them  to  follow  a  certain  course — how 
much  money  the  stockholders  shall  pay,  and  whether 
this  sum  shall  be  paid  at  once  or  in  regular  or 
"cal}ed"  installments.  Stock  paid  for  at  one  time  or 
paid  in  regular  installments  is  full-paid  stock.  When 
only  a  partial  payment  has  been  made  the  remainder 
continues  to  be  an  obligation  on  the  part  of  the 
stockholder.  Such  stock  is  called  assessable  stock. 
The  element  of  uncertainty  connected  with  this  type 
of  stock  does  not  make  it  very  popular.  When  one 
buys  such  stock  one  never  knows  whether  he  is  buy- 
ing a  source  of  income  or  a  debt.  A  corporation  will, 
therefore,  as  much  as  possible  issue  only  stock  which 
is  full-paid. 

Where  only  a  partial  cash  payment  is  received  the 
difference  is  frequently  made  up  by  a  transfer  of 
property,  tangible  or  intangible,  such  as  patent 
rights  or  "services."  It  is  clear  that  in  such  a  case 
the  difference  between  the  par  value  of  the  stock  and 


48  BUSINESS     ORGANIZATION 

the  actual  cash  payment  constitutes  the  supposed 
value  of  the  services  or  of  the  property  transferred. 
The  board  of  directors  or  the  promoting  syndicate 
determines  these  values.  If  their  estimates  are  far 
above  the  actual  value,  then  the  par  value  of  the 
issued  stock  and  consequently  of  the  authorized  capi- 
tal is  in  excess  of  the  actual  value  of  the  assets  both 
tangible  and  intangible.  Such  a  condition  is  called 
overcapitalization  and  the  stock  thus  issued  is  called 
watered  stock.  This  may  or  may  not  be  a  bad  thing. 
Frequently  an  overcapitalization  is  fully  justified  by 
the  advantages  resulting  from  incorporation,  such  as 
more  favorable  credit  and  better  management. 

Transfer  of  Stock,  The  original  owners  do  not  al- 
ways care  to  continue  to  invest  their  money  in  the 
corporation,  and  may  wish  to  sell  their  ownership 
rights  to  others.  This  they  do  by  selling  their  stock 
certificates.  Since  each  one  of  these  stock  certificates 
bears  the  name  of  the  original  owner  and  the  certifi- 
cate is,  moreover,  recorded  in  his  name  on  the  books 
of  the  company,  it  is  necessary  that  he  formally  re- 
linquish his  right.  This  he  does  by  placing  his  name 
on  the  back  of  the  certificate,  in  other  words,  by  in- 
dor  sing  the  document.  This  is  called  indorsement  in 
blank  because  the  name  of  the  new  owner  has  not 
yet  been  inserted.  Such  a  certificate  may  now  pass 
from  hand  to  hand  and  not  until  the  time  comes 
when  dividends  are  to  be  paid  is  the  name  inserted 
of  the  person,  who  at  that  time  is  the  owner.    The 


BUSINESS     ORGANIZATION  49 

certificate  is  then  sent  to  the  transfer  agent  of  the 
corporation,  who  will  make  the  transfer  on  the  books 
and  will  issue  a  new  certificate. 

It  is  important  that  this  transfer  take  place  in 
proper  time,  for  dividend  checks  are  mailed  to  the 
persons  whom  the  books  show  as  owners  of  the  stock. 
In  order  to  prevent  the  issuing  of  more  certificates 
than  are  authorized,  a  registrar  is  appointed  who 
checks  the  certificates  issued  by  the  transfer  agent. 

Dividends.  After  the  net  income  for  the  year  has 
been  determined  by  the  accountants,  the  directors 
decide  how  it  shall  be  spent.  They  may  decide  to 
divide  it  among  the  stockholders  or  to  retain  all  or 
a  part  of  it  in  the  business.  Since  the  capital  of  the 
corporation  has  once  for  all  been  determined  in  its 
articles  of  incorporation,  this  addition  to  the  per- 
manent investment  must  appear  under  another  head- 
ing on  the  balance  sheet.  The  account  which  almost 
invariably  receives  this  charge  is  surplus.  It  is  cus- 
tomary never  to  use  this  surplus  for  the  payment  of 
dividends,  though  there  is  no  legal  reason  why  it 
should  not  be  so  used  in  the  future. 

By  not  receiving  the  dividends  during  any  one  year 
the  stockholders  suffer  a  loss  in  income,  although  this 
loss  is  offset  by  the  increase  in  value  of  the  corpora- 
tion's assets.  Where  the  body  of  stockholders  is 
fairly  constant  the  benefit  fully  offsets  the  sacrifice, 
but  in  the  case  where  the  body  of  stockholders  is  con- 
stantly changing,  the  financial  interests  of  the  present 


50  BUSINESS     ORGANIZATION 

group  of  owners  are  sacrificed,  while  some  future 
group  will  reap  the  results.  The  stockholders  may 
disapprove,  but  they  have  no  way  of  forcing  the  direc- 
tors to  pay  them  a  definite  part  of  the  profits  made. 
The  declaring  of  any  dividend  is  entirely  at  the  op- 
tion of  the  directors. 

As  a  rule  the  directors  will  try  to  maintain  a  steady 
rate  of  dividend.  Their  act  of  withholding  a  portion 
of  the  net  income  may  be  merely  the  result  of  that 
ideal.  Stocks  with  a  fairly  uniform  rate  of  dividend 
find  a  more  ready  market  and  prepare  the  way  for 
other  issues  of  securities  by  the  same  company.  It  is 
usually  unwise  to  pay  out  all  the  profits  made  in  a 
year  of  exceptional  prosperity.  Careful  financial 
management  should  be  wide  awake  to  possible  hard 
times  to  come,  especially  in  industrial  concerns,  which 
as  a  rule  are  subject  to  great  fluctuations.  A  portion 
of  the  profits  laid  aside  in  times  of  prosperity  may 
aid  the  company  to  face  the  dangers  of  a  temporary 
slackening  of  business.  A  company  may  be  seri- 
ously troubled  through  a  neglect  of  this  principle. 

As  a  rule  dividends  are  paid  in  cash.  In  order  to 
have  sufficient  cash  available  at  the  right  time  the 
company  must  take  proper  measures  to  convert 
enough  assets  into  cash  in  advance  of  declaring  divi- 
dends. Where  this  is  neglected  it  may  become 
necessary  to  borrow  money  to  pay  dividends. 

It  may  not  always  be  wise  to  pay  dividends  in  cash. 
There  may  be  reasons  for  hiding  the  actual  profits 


BUSINESS     ORGANIZATION  5I 

made  from  the  general  public.  A  withdrawal  of  cash 
may  seem  unwarranted,  especially  where  a  large  ac- 
cumulation of  surplus  has  taken  place.  In  such  cases 
stock  dividends  may  be  paid.  This  means  that  the 
stockholders  are  presented  with  one  or  more  shares 
of  additional  stock.  It  will  usually  be  necessary  to 
increase  the  capitalization  in  order  to  accomplish 
this.  This  means  capitalizing  the  surplus^  a  legiti- 
mate act  as  long  as  the  surplus  has  resulted  from 
actual  earnings  and  not  from  the  marking  up  of 
assets. 

The  stockholders*  position  is  not  thereby  improved. 
Whether  one  owns  shares  with  a  face  value  of  $200 
out  of  a  total  capitalization  of  $100,000,  or  $400 
worth  out  of  a  capital  of  $200,000  makes  no  differ- 
ence. In  either  case  one  is  entitled  to  1/500  of  the 
total  profits.  The  principal  advantage  is  derived 
from  the  fact  that  the  market  price  of  each  share  of 
stock  has  become  less  and  that  it  is,  therefore,  more 
readily  sold. 

Summary.  The  proprietorship  of  a  business  may 
be  in  the  hands  of  one  person  or  of  many.  In  the 
latter  case,  the  business  may  be  organized  as  a  part- 
nership or  as  a  corporation.  The  advantages  of  the 
corporation  are  limited  liability,  perpetual  life,  sepa- 
ration of  management  and  ownership.  Frequently 
corporations  are  organized  by  promoters.  Evidences 
of  ownership  are  called  shares  of  stock ;  the  corpora- 
tion issues  certificates  which  are  recorded  by  a  regis- 


52  BUSINESS     ORGANIZATION 

trar  and  a  transfer  agent.  There  are  many  different 
kinds  of  stocks.  They  may  be  divided  into  two  large 
classes:  common  and  preferred.  Preferred  stock  may 
be  preferred  as  to  dividends,  voting  rights,  or  assets. 
The  payment  of  dividends  is  in  the  hands  of  the 
board  of  directors. 

REFERENCES 

L.  H.  Haney.    Business  Organization  and  Combination. 

The  Macmillan  Company. 
T.  L.  Greene.    Corporation  Finance.    G.  P.  Putnam's  Sons. 
E.   S.    Mead.      Corporation  Finance.      D.  Appleton  and 

Company. 
W.  H.  Lough.     Business  Finance,     The  Ronald  Press 

Company. 

QUESTIONS  FOR  FURTHER  STUDY 

1.  It  is  said  that  stockholders  in  the  United  States 
are  largely  ignored  in  matters  of  management  by  the 
directors  of  the  corporations.  Can  you  discover  a  reason 
why  this  condition  is  not  found  to  the  same  extent  else- 
where? 

Reference:   Lough.    Part  I,  Chapter  IIL 

2.  What  is  the  purpose  of  a  voting  trust? 
Reference:   Lough.    Part  II,  Chapter  V. 

3.  What  are  some  of  the  effects  of  lack  of  care  in  the 
declaring  of  dividends? 

Reference:   Lough.    Part  IV.    Chapter  XIX. 

4.  Describe  in  detail  the  operation  of  an  underwriting 
syndicate. 

Reference:   Lough.    Part  III,  Chapter  XV. 


BUSINESS     ORGANIZATION  53 

TEST  QUESTIONS 

1.  What  are  the  advantages  of  the  corporate  organi- 
zation? 

2.  What  is  meant  by  the  terms  par  value,  cumulative 
preferred,  proxy,  subscription? 

3.  How  is  a  corporation  controlled? 

4.  How  is  stock  transferred  ? 

5.  What  are  the  advantages  of  regular  dividends? 

6.  What  is  a  stock  dividend? 


54  BUSINESS      ORGANIZATION 


CHAPTER   IV 

FINANCING  AN  ENTERPRISE 
(Working  Capital) 

The  Owned  Capital  of  an  Enterprise.  As  we  have 
iseen  in  the  preceding  chapter,  a  business  may  be 
»owned  singly  or  by  a  group  of  owners  who  form  a 
partnership,  a  joint  stock  company,  or  a  corporation. 
"These  owners  supply  the  necessary  funds  with  which 
to  launch  the  enterprise. 

The  first  decision  which  the  owners  face  is  how  the 
money  shall  be  spent.  They  must  buy  land,  build- 
ings, possibly  machinery  and  tools,  and  they  must 
invest  in  raw  material,  labor,  and  fuel.  It  is  no  easy 
matter  to  decide  how  much  should  be  allowed  for 
-each  purpose.  Many  concerns  are  doomed  to  failure 
from  the  very  outset  on  account  of  an  unwise  decision 
•of  this  important  question.  There  is  a  great  tempta- 
tion to  buy  a  fine  building  and  the  very  best  and  most 
^expensive  machinery,  in  a  belief  that  this  means 
"starting  out  right."  As  a  matter  of  fact,  it  may  mean 
the  very  opposite. 

Working  Capital  and  Investment  Capital.  Many 
farmers  are  said  to  be  land  poor.  By  this  is  meant 
that  they  are  landowners  and,  therefore,  not  poor  in 
the  ordinary  sense  of  the  word,  but  that  they  are  poor 


BUSINESS     ORGANIZATION  55 

in  that  they  have  no  ready  cash — no  working  fund.. 
When  they  are  called  upon  to  pay  wages  or  to  buy 
necessities  they  must  borrow  from  others. 

Many  a  business  concern  is  in  somewhat  the  same 
condition.  A  large  proportion  of  the  funds  or  capital 
of  the  enterprise  is  tied  up  in  buildings,  machinery, 
and  more  .or  less  permanent  equipment;  and  little  is 
left  to  operate  the  enterprise,  and  to  carry  on  enough 
business  to  keep  the  capital  investment  working  at 
full  time.  Business  failures  frequently  result  from  this 
mistake  in  the  distribution  of  the  available  funds. 

When  starting  a  business  undertaking  two  ques- 
tions must,  therefore,  be  studied.  The  first  question 
is  how  much  money  is  needed  to  start  the  enterprise, 
and  the  second  question,  of  equal  importance,  is  how 
shall  these  funds  be  divided  between  capital  investment 
and  working  capital?  Only  experience  can  determine 
how  much  working  capital  is  needed  in  a  business. 
Certain  fundamental  principles  may  be  recognized. 

Factors  Influencing  Amount  of  Working  Capital 
Needed.  The  Turnover.  One  of  the  most  important 
factors  in  determining  the  amount  of  working  capital 
needed  is  the  rapidity  of  the  turnover.  By  turnover  is 
meant  the  number  of  times  the  stock  is  sold  out  and 
replenished.  If  a  store  has  on  hand  goods 
valued  at  $100,000,  that  is  to  say,  valued  at  sales 
price,  and  the  total  sales  of  the  store  amount  to 
$300,000  a  year,  then  it  is  said  that  this  store  turns 
over  its  stock  three  times  a  year.     By   investing 


56 BUSINESS     ORGAN  I  Z  A  T  I  O  N 

$icx),ooo  in  goods  the  store  has  done  a  business  of 
$300,000.  Another  store,  with  a  less  rapid  turnover, 
in  order  to  do  a  $300,000  business  must  tie  up  more 
than  $100,000.  Take,  for  example,  a  concern  which 
turns  its  goods  over  twice  a  year  instead  of  three 
times.  This  will  necessitate  a  constant  investment  in 
stock  of  $150,000.  Hence,  it  is  plain  that  in  order  to 
carry  on  the  same  volume  of  sales  the  second  store 
needs  more  working  capital. 

This  same  situation  exists  in  a  factory.  Here  it  is 
the  rapidity  with  which  the  goods  are  sold  out  of  the 
warehouse  which  determines  the  amount  of  money 
tied  up  in  stock.  But  still  another  factor  enters  in. 
The  stock  which  must  be  kept  on  hand  to  fill  orders 
promptly  is  one  factor,  the  length  of  the  manufactur- 
ing process  is  another.  The  more  time  is  consumed 
in  that  process  the  more  "goods  in  process"  are  on 
hand  at  any  one  time  in  the  factory.  These,  too, 
represent  investment.  The  raw  material  which  must 
be  kept  in  stock  is  still  another  factor.  If  the  factory 
is  forced  to  import  its  raw  material  in  large  quantities 
from  foreign  countries  the  raw  material  investment 
may  be  very  considerable.  When,  on  the  other  hand, 
the  factory  is  placed  near  a  source  of  material  so 
that  any  needs  may  be  quickly  filled  and  hardly  any 
raw  material  need  be  carried  in  store,  then  the  invest- 
ment in  raw  material  becomes  negligible.  In  a  fac- 
tory the  amount  of  funds  tied  up  in  stock  is,  there- 
fore, determined  by  the  rate  of  turnover  of  finished 


BUSINESS     ORGANIZATION  57 

goods,  the  raw  material  stores,  and  by  the  length  of 
the  manufacturing  process. 

""Seasonal  Production  Requires  Large  Working  Capi- 
tal. Whenever  anything  interferes  with  the  regular 
turnover  of  a  business,  stock  will  accumulate  and  tie 
down  a  large  share  of  the  ready  funds.  Seasonal  in- 
dustries such  as  the  straw  hat  industry  and  the 
clothing  industries,  must  manufacture  their  goods 
months  in  advance  in  order  to  have  them  in  the  re- 
quired quantity  when  the  summer  demand  comes. 
This  means  that  the  working  capital  is,  to  a  very 
large  degree,  tied  up  in  finished  goods.  The  amount 
of  business  the  concern  can  do  at  the  time  the  tem- 
porary demand  is  active  is  limited  beforehand  by 
the  amount  of  capital  the  concern  has  been  able  to 
invest  in  finished  goods  during  the  manufacturing 
months  of  the  slack  season.  If  firms  always  paid 
cash  for  their  purchases  of  raw  materials  and  other 
necessary  goods,  such  seasonal  industries  would  re- 
quire huge  amounts  of  working  capital.  A  firm  does 
not  necessarily  supply  all  of  its  working  capital. 

Borrowing  Working  Capital.  Trade  Credit.  It  is 
not  always  necessary  to  pay  cash  for  goods.  It  is 
possible  to  postpone  payment  or,  as  it  is  called,  to 
buy  on  credit.  By  this  method  a  business  may  be 
carried  on  with  comparatively  little  actual  working 
capital.  Retailers  buy  their  goods  in  this  way  from 
the  wholesaler  or  manufacturer,  and  are  allowed  to 
postpone  their  payment  long  enough,  so  that  they 


58  BUSINESS     ORGANIZATION 

frequently  sell  the  goods  to  the  consumer  before 
payment  is  due.  They  can  then  use  the  money  they 
received  from  their  customers  to  pay  the  wholesaler 
or  manufacturer. 

Manufacturers  may  in  this  way  buy  their  raw 
material,  or  partly  finished  goods,  and  wholesalers 
may  again  make  similar  terms  with  manufacturers. 
This  buying  on  credit  is  most  frequently  found  in  the 
retail  trade,  and  here  principally  among  the  small 
concerns,  while  the  manufacturer  uses  this  method 
of  raising  funds  but  very  little.  There  is  a  good 
reason  for  this.  Although  by  this  method  a  business 
may  get  along  with  little  working  capital,  the  firm 
which  allows  the  postponement  of  payment  does  not 
grant  this  privilege  for  nothing. 

The  price  of  goods  sold  on  credit  is  always  higher 
than  that  of  goods  sold  for  cash.  This  needs  no  ex- 
planation for  it  is  clear  that  the  firm  selling  on  credit 
is  really  lending  its  working  capital  to  its  customers. 
The  more  a  firm  is  compelled  to  sell  on  credit  and  the 
longer  the  period  of  credit  that  must  be  allowed,  the 
more  working  capital  that  firm  will  need,  and  the 
higher  is  its  cost  of  doing  business.  It  is,  therefore, 
fair  that  the  buyer  should  pay  for  the  privilege  of  re- 
ceiving credit.  When  in  ordinary  business  transac- 
tions goods  are  sold  for,  say,  $i,ooo  and  5  per  cent 
off  for  cash  within  ten  days,  and  the  custom  of  the 
trade  is  that  credit  shall  run  no  longer  than  two 
months,  then  it  means  that  the  business  firm  is  pay- 


BUSINESS     ORGANIZATION  59^ 

ing  a  very  high  rate  of  interest  for  the  credit  accom- 
modation. The  choice  lies  between  a  cash  payment  of 
$950  at  the  end  of  ten  days  or  a  $i,ooo  payment  fifty 
days  later.  For  the  fifty  days  use  of  $950  the  buyer 
pays  $50  or  the  equivalent  of  37.89  per  cent  a  year. 

Whenever  the  buyer  is  able  to  find  some  cheaper 
way  of  obtaining  temporary  use  of  funds  other  than 
this  commercial  credit,  it  will  pay  him  to  make  use 
of  it.  For  this  reason  large  department  stores  and 
well-established  manufacturing  firms,  who  can  bor- 
row money  readily  and  at  a  moderate  rate,  find  it  to 
their  advantage  to  pay  cash  for  their  purchases  and. 
to  borrow  money  in  some  other  way. 

Borrowing  from  the  Banks,  One  method  of  securing, 
cash  with  which  to  pay  for  purchases  is  to  borrow 
from  the  banks.  The  banks  are  always  on  the  look- 
out for  safe  investments  in  which  to  place  their  sur- 
plus funds,  but  they  must  be  careful  in  the  choice  of 
their  investments.  The  principle  that  should  always^ 
be  borne  in  mind  when  investing  the  funds  of  a  com- 
mercial bank  is  that  in  order  to  be  able  to  meet  de- 
mand obligations  one  must  invest  only  in  liquid 
loans.  A  liquid  loan  is  a  loan  which  has  only  a  com- 
paratively short  time  to  run  and  which  is  self- 
liquidating.  This  last  feature  is  quite  as  importat^t 
as  the  first.  A  loan  is  self-liquidating  if  the  funds  are 
spent  in  such  a  way  that  the  transaction  itself,  pro- 
viding everything  goes  as  anticipated,  will  produce 
the  means  of  its  own  payment. 


60  BUSINESS     ORGANIZATION 

Take  an  example:  If  a  man  borrows,  with  the  de- 
sire to  buy  an  automobile,  that  loan  cannot  be  called 
a  liquidating  loan,  for  the  possession  of  the  machine 
does  not  increase  his  power  to  repay  the  sum  bor- 
rowed. As  a  matter  of  fact,  the  cost  of  the  gasoline, 
tires,  and  repairs  may  place  him  financially  in  a  less 
favorable  position  than  before  the  purchase.  But  let 
him  invest  the  same  amount  in  a  delivery  wagon  for 
his  store  and  the  situation  is  different.  Now  he  can 
please  his  customers  by  quick  delivery,  he  may  be 
able  to  do  away  with  two  or  possibly  three  horse  and 
wagon  outfits,  or  he  may  be  able  to  expand  his  busi- 
ness in  another  section  of  town.  The  delivery  equip- 
ment increases  his  earning  capacity.  This  is  a  self- 
liquidating  investment.  It  earns  money  to  pay  for 
itself. 

In  order  to  make  certain  that  the  funds  of  the  bank 
are  invested  in  the  right  kind  of  loans,  the  banker 
will  request  from  the  prospective  borrower  a  state- 
ment of  hirf  business  and  of  the  purpose  for  which  the 
loan  is  to  be  used.  A  model  of  such  a  statement  as 
prepared  by  the  Federal  Reserve  Board  is  attached 
opposite  this  page  and  should  be  studied  carefully. 
If  properly  filled  out  such  a  statement  gives  a  clear 
picture  of  the  financial  condition  of  the  firm  in 
question. 

The  Promissory  Note.   After  the  banker  has  studied 

this  statement  and  has  been  convinced  from  conver- 
sation with  the  borrower  that  the  purpose  for  which 


BUSINESS     ORGANIZATION 


6l 


LiIATEMENT  OF 

Business vAddsbss 

Xo Bank  of 

We  make  the  following  statement  of  all  the  assets  and  liabilities  of  our  firm  at  the  close 

of  business  on and  give  other  material  informatioa 

for  the  purpose  of  obtaining  advances  on  notes  and  bi'ls  bearing  our  signature  or  indorse- 
ment, and  for  obtaining  credit  generally  on  present  and  future  applications. 


[please  answer  all  questions  and  fill  in  all  blanks! 


ASSETS 

1 

LIABILITIES 

Notes  Payable  to  Banks. 
Notes  Payable  to  Others 
Deposits          

Other  Quick  Assets  (Item- 

Other  Current  Liabilities 

Quick  Assets . 
Land  and  Buildings 





— 

Current  Liabilities . 
Mortgages 



Other   Deferred   Liabili- 
ties (Itemize) 

Ofh«»r  A<9<»>t:9  ^Itemized^  .  . 



■ — 

Current  and  Deferred 

Liabilittes. 

Net  Worth 



TOTAL 

TOTAL 

Contingent  Liability.    As  indorse 

r$ 

market                                                                     ' 

Finished  $ Unfinished 

If    any    goods    are    on    coi 
amount  and  circumstances 

$ RawJ... 

isignment,    state 

As  guarantor  $ No  accounts  have 

been  sold  of  assigned  except  as  follows 

Accounts  and  Notes  Payable.     If  any  are 

past  due  state  amount  and  circumstances . 

SaUs  and  Profits  Last  Fiscal  Year.  Net  Sales 

Net  profits  $     ^          .                    .... 

During  last  fiscal  year  current  liabilities 

Accounls  and  Notes  Receivable.     If  any  past 

were    at    maximum     {$ 

at    a    minimum 

stances - 

(J                   )  on 

If  any  amounts  are  due  from  n 
firm,  employees,  branches  or  s 
state  amounts  and  circumstan 

lembers  of  the 
milar  sources, 

^^ 

Mortgages  and  Other  Liens.   State  due  date 

of  mortgages  and  on  what  assets  a  lien 

Is   mortgage   a   lien   on   any   current 

assets?                         .  .         

If  any  other  liens  on  assets,  state  amount 

and  if  readily  salable  at  value  stated 

:::::::: 

Reserves  and  Depreciation.  State  what  pro- 

:::::":::'::::: | 

j 

Merchandise? Life,  in 

av 

or  of  firm  $ ...  1 

We  hereby  certify  that  the  foregoing  figures  are  taken  from  the  books  of  our  firm  and 
that  they  and  the  statements  contained  on  both  sides  of  this  sheet  are  true  and  give  a  cot' 
rect  showing  of  our  financial  condition. 

IQI Firm    Name 


Signed  this day  of . 


By. 


(OVER) 


Member  of  Firm 
Federal  Reserve  Bank  of  New  York  Statement  Form 


62 


BUSINESS     ORGANIZATION 


Date  of  Partnership Date  of  Expiration. 


General  Partners                         | 

Special  Partners 

Name 

Amount 

Con- 
tributed 

Net 
Worth 
Outside 

This 
Business 

Name 

Amount 

Con- 
tributed 

Partner 
Until 

If  the  firm  has  any  branch  offices  state  location  and  how  accounts  are  handled. 


If  the  firm  or  any  member  is  connected  with  any  other  business,  state  nature  of  the  busi- 
ness and  extent  to  which  interested 


What  is  the  practice  of  the  firm  in  regard  to  trade  discounts? . 


Are  boolcs  audited  by  a  certified  public  accountant? 

Give  date  of  last  audit 

Location  and  Description 
of  Land  Owned 

Estimated 
Value 

Assessed  at 

Mtgd.  for 

Insured  for 

Title.    The  legal  and  equitable  title  to  all  pieces  of  above  described  real  estate  is  solely 
in  the  name  or  names  of  one  or  more  of  the  members  of  the  firm,  except  as  follows 


(The  balance  of  this  space  may  be  used  for  printing  any  questions  desired  to  be  asked 
amplifying  statement  of  condition  as  shown  on  opposite  page) 


the  loan  is  to  be  spent  Is  sound,  he  will  consent  to  the 
loan.  Before  the  money  is  handed  over  to  the  bor- 
rower he  must  prepare  an  evidence  of  his  debt  which 
is  to  be  left  with  the  bank  until  redeemed.  This  evi- 
dence will  usually  take  the  form  of  a  promissory  note. 
The  form  of  such  a  note  is  simple.  No  stated  form 
is  required.  It  is  necessary,  however,  that  it  contain 
the  name  of  the  person  to  whom  the  payment  is  to 
be  made,  the  date  when  the  payment  is  due,  the 
amount  of  the  payment,  the  date  when  the  contract 


BUSINESS     ORGANIZATION  63 

was  made,  and  that  it  is  signed  by  the  penson  making 
the  promise  to  pay.  When  any  of  these  features  are 
absent  the  note  is  not  complete  and  there  may  be 
doubt  as  to  its  legality.     (See  model  below.) 


$  Palo  Alto.  California, 19...  No. 

On after  date,  for  value  received,  I,  we,  or  either  or  us,  promise  to  pay  to 

the  order  of.    .  _    ._         _ _  $ 

•t  the  FIRST  NATIONAL  BANK  OF  PALO  ALTO,  CALIFORNLV.' 

DOUARS 

With  Intcteit  it  eight  ptt  cfnt.  (»t  annum tntereK  payable  quanerly,  and  IntcKtt  and  principal  not 

-paid  at  maturilv  to  draw  tight  ptr  cent,  annual  lntete>t.both  principal  and  interest  payable  In  United  Statei  gold  coin.  The  makers,  endorsers 
at\d  guarantors  of  ihts  note  agree  to  pay  a  reasonable  anomev'l  fee  if  suit  is  brought  hereon,  and  hereby  severally  waive  presentment  of  pay- 
ment, notice  of  non.payment,  protest  and  notice  of  ptotest.  and  diligence  in  b^f^git\g  sutt  against  at\y  party  therero,  and  sureties  coiuent  that 
time  of  payment  may  be  extended  wiihout  notice  thereof     And  a  failure  to  pay  Interest  wiUiin  ten  days  afwr       '^  '        '    " 

whole  sum  to  become  due  and  payable. 


As  a  rule  there  is  included  in  the  note  a  statement 
in  regard  to  the  interest  to  be  paid  on  the  money 
thus  obtained. 

Such  a  promissory  note  may  be  single-name  paper, 
which  is  the  case  when  one  signature  appears  on  a 
note,  or  it  may  be  a  joint  note^  in  which  case  two  or 
more  signatures  appear.  A  joint  note  may  be  two,- 
three-,  or  four-name  paper,  according  to  the  number 
of  signatures. 

In  order  to  make  a  note  negotiable  or  transferable, 
it  is  necessary  to  add  to  the  name  of  the  one  who  is  to 
receive  the  money  the  words  "or  order,"  or  "or 
bearer";  this  makes  it  possible  for  the  creditor  to 
transfer  his  right  to  some  other  person.    This  trans- 


64  BUSINESS     ORGANIZATION 

fer  takes  place  through  indorsement,  and  may  be  ac- 
complished by  affixing  the  signature  of  the  payee  on 
the  back  of  the  document.  This  is  called  a  general 
indorsement  to  distinguish  it  from  a  specific  indorse- 
ment, which  names  the  person  to  whom  the  payment 
is  to  be  made. 

The  Security  Back  of  the  Loan,  In  the  case  of  the 
notes  just  described,  the  only  security  which  the 
bank  has  is  the  honesty  of  those  who  signed  the  note. 
The  banker  may  know  these  men  and  may  have  con- 
fidence in  them ;  he  may  be  certain  that  the  borrower 
and  his  friends  may  be  perfectly  willing  to  pay  when 
the  note  falls  due,  but  the  question  is  whether  the 
borrower  will  be  able  to  pay.  A  loan  is,  then,  only 
safe  when  the  borrower  combines  ability  with  willing- 
ness to  pay. 

There  is  nothing  in  the  ordinary  promissory  note 
that  gives  any  information  about  this  ability  to  pay, 
nor  any  certainty  in  regard  to  the  way  in  which  the 
money  is  to  be  spent.  The  banker  may,  therefore, 
ask  some  additional  security.  This  security  is  called 
collateral.  A  very  common  method  is  to  deposit  with 
the  bank  a  security  of  bonds,  stocks,  or  other  valu- 
able documents  acceptable  to  the  bank.  These  must 
be  properly  indorsed  or  made,  as  it  is  called  good  de- 
livery, for  unless  so  indorsed  the  bank  could  not  sell 
them  as  the  need  arose. 

Many  merchants  offer  their  accounts  receivable  as 
security  for  loans.     An  account  receivable  is  an  ac- 


BUSINESS     ORGANIZATION  65 

count  upon  the  books  of  the  borrowing  firm  which 
shows  that  a  certain  amount  of  money  is  due  from 
another  concern.  This  method  is  becoming  quite 
general.  In  a  way  it  is  efficient  and  safe,  but  it  may 
give  rise  to  fraud  for  it  is  possible  for  a  business  man 
to  assign  his  accounts  receivable  to  one  bank  and 
then  to  use  these  same  accounts  as  a  basis  for  direct 
loans  from  some  other  bank. 

Another  method  to  obtain  ready  money  is  to  bor- 
row money  on  merchandise.  Manufacturers  fre- 
quently place  their  raw  material  in  warehouses  and 
borrow  money  from  banks  and  give  the  warehouse 
receipts  as  security.  The  amount  which  the  banks 
are  willing  to  lend  will  be  determined  by  the  charac- 
ter of  the  merchandise.  Only  merchandise  for  which 
there  is  a  steady  and  fairly  constant  market  can  be 
made  the  basis  of  loans,  while  perishable  goods  form 
very  dangerous  security. 

Banks  never  lend  up  to  the  total  value  of  the  mer- 
chandise, they  hardly  ever  lend  more  than  about 
80  per  cent,  and  usually  less. 

Merchandise  as  Security  for  Loans.  It  is  not  neces- 
sary to  keep  the  merchandise  stored  away  in  a  ware- 
house while  it  is  being  used  as  collateral.  Goods  may 
move  freely  from  one  part  of  the  country  to  another, 
or  even  to  foreign  countries,  and  may  change  hsmds 
several  times,  financed  all  the  while,  not  by  those 
who  deal  in  the  goods,  but  by  banks. 


66  BUSINESS     ORGANIZATION 

Agricultural  products  travel  that  way  from  farmer 
to  domestic  or  foreign  buyer.  The  farmer  usually 
needs  and  demands  cash  for  his  product.  He  has  in 
all  probability  accumulated  a  large  bill  with  his  local 
grocery  and  dry  goods  stores  during  the  period  be- 
tween harvests,  and  he  may  also  have  to  pay  for  his 
farm  machinery  which  he  bought  earlier  in  the  year 
on  credit.  He  needs  the  means  of  payment,  there- 
fore. He  demands  cash  or  a  deposit  in  his  favor 
with  a  bank  against  which  he  can  draw  checks.  The 
traveling  buyers  have  only  a  limited  amount  of  cash 
at  their  disposal.  They  may  be  able  to  pay  cash  for 
the  crops  of  one  or  two  farmers,  but  if  they  had  no 
other  way  of  obtaining  cash  they  would  have  to  wait 
with  further  purchases  until  the  crops  had  been 
moved  to  some  central  market  like  St.  Louis,  Chi- 
cago, or  Kansas  City,  and  sold  to  the  middlemen 
who  form  the  link  between  these  large  primary 
markets  and  the  consumers. 

The  local  buyer  is  able  to  borrow  from  the  bank 
by  the  following  process :  he  draws  a  bill  of  exchange 
or  draft  on  the  commission  men  or  wholesaler  at  the 
primary  market  to  whom  the  products  are  consigned. 

Bills  of  Exchange  or  Drafts.  A  draft  is  an  order  to 
pay  a  specified  amount  of  money  to  a  specified  person 
at  a  definite  time. 

This  order  to  pay  is  worth  money  and  the  banks 
are  willing  to  buy  it.  Since  the  money  is  not  due 
immediately  but  only  after  a  certain  period  of  time, 


BUSINESS     ORGANIZATION  67 

and  since  a  certain  amount  of  risk  is  also  involved  in 
the  transaction,  the  banks  will  charge  a  fee  for  this 
service.  This  fee  is  deducted  in  advance,  so  that  a 
draft  of,  say,  $i,ooo  which  is  due  three  months  later 
may  not  bring  much  more  than  $985.  The  difference 
between  the  face  value  of  the  draft  and  the  amount 
actually  received,  in  this  case  $15,  is  called  discount. 
Discount  is  calculated  like  interest  on  the  basis  of  a 
certain  percentage  a  year.  In  the  example  the  dis- 
count charged  was  6  per  cent. 

The  security  back  of  this  draft  may  be  merely  the 
reputation  of  the  firm  on  which  it  is  drawn.  Fre- 
quently the  merchandise  which  forms  the  basis  of 
the  transaction  is  given  as  a  collateral.  The  banks 
do  not  receive  the  goods  themselves,  but  instead  a 
receipt  of  the  railroad  company,  called  a  bill  of  lading 
or  waybill,  which  is  evidence  that  a  certain  quantity 
of  grain  or  cotton  or  some  other  kind  of  product  has 
been  shipped.  The  railroad  company  will  only  make 
delivery  of  the  goods  against  return  of  this  bill  of 
lading.  The  bank  receiving  this  document  is,  there- 
fore, certain  that  the  goods  will  not  be  released  with- 
out its  knowledge,  and  will  not  hand  this  valuable 
document  to  the  firm  upon  which  this  draft  was 
drawn,  until  certain  that  payment  has  been  made,  or 
until  some  satisfactory  arrangement  has  been  made 
for  payment  at  some  future  date. 

A  draft  may  be  a  sight  draft,  which  means  that  it 
is  payable  upon  presentation,  or  it  may  be  a  time 


68  BUSINESS     ORGANIZATION 

draft,  A  time  draft  is  a  draft  payable  on  a  certain 
day  or  a  certain  length  of  time  after  being  presented, 
after  sight. 

The  Acceptance.  The  firm  upon  whom  a  time 
draft  is  drawn  may,  upon  presentation,  accept  the 
draft.  The  acceptance  is  made  by  writing  across  the 
face  of  the  draft  the  word  accepted,  with  the  signature 
of  the  party  accepting.  Usually  there  is  also  added 
the  date  and  the  place  where  payment  is  to  take 
place.  The  draft  is  then  called  a  trade  acceptance. 
Sometimes  banks  will  accept  drafts  for  their  clients 
against  a  moderate  fee.  Such  drafts  are  known  as 
hank  acceptances. 

Acceptances  are  not  used  very  much  in  the  United 
States,  but  they  are  very  commonly  used  in  England. 
The  Federal  Reserve  Board  has  at  various  times  sug- 
gested the  more  general  use  of  this  method  of  financ- 
ing transactions. 

The  accepted  draft  is  an  evidence  of  a  live  business 
deal.  As  a  rule  such  documents  arise  as  the  direct 
result  of  the  sale  of  goods.  Such  a  transaction  is  very 
likely  to  be  self-liquidating.  An  accepted  draft  is, 
therefore,  readily  discounted  at  the  bank  and  may 
even  be  sold  in  the  open  market.  This  is  done  in 
other  countries  to  a  very  large  extent.  Many  firms 
which  have  funds  temporarily  available  for  a  short- 
time  investment,  find  in  the  buying  of  these  accept- 
ances a  way  of  employing  their  idle  cash  safely.  This 
safe  kind  of  commercial  paper,  therefore,  aids  in 


BUSINESS     ORGANIZATION  69 

mobilizing  resources  of  the  community  which  would 
otherwise  lie  idle. 

The  banks  momentarily  unable  to  invest  in  com- 
mercial paper  thus  lend  their  credit  by  accepting  the 
draft,  after  which  it  will  be  readily  bought  in  the 
open  market.  This  situation  illustrates  better,  per- 
haps, than  any  other  banking  transaction,  that  a 
bank*s  main  function  is  to  exchange  unknown  credit 
for  known  credit,  thereby  greatly  facilitating  the 
processes  of  exchange. 

The  Credit  System.  As  a  result  of  the  use  of  credit, 
either  trade  credit  or  banking  credit,  a  merchant  Is 
enabled  to  get  along  with  little  working  capital.  He 
can  buy  more  than  his  actual  cash  would  allow.  He 
can  expand  his  business,  the  volume  of  his  goods  on 
hand,  and  his  sales,  way  beyond  his  cash  resources. 
He  can  expand  as  long  as  the  banks  and  merchants 
continue  to  have  confidence  in  his  ability  and  hon- 
esty. Only  when  they  begin  to  doubt  his  ability  "to 
swing  the  deal"  is  a  man's  growth  retarded.  A  mer- 
chant's progress  is  no  longer  limited  by  what  he  pos- 
sesses in  the  way  of  money,  but  by  his  ability  and 
energy.  In  so  far  the  credit  system  is  far  superior 
to  a  system  under  which  no  one  can  engage  in  a  new 
transaction  until  some  other  transaction  has  been 
completed  and  has  yielded  its  proceeds. 

The  only  danger  in  the  credit  system  lies  in  the 
fact  that  men  are  inclined  to  be  Kjveroptimistic. 
They  carry  others  along  with  their  enthusiasm,  and 


70  BUSINESS     ORGANIZATION 

as  a  result  merchants  will  sometimes  overbuy^ 
i.  e.y  overreach  themselves,  and  they  may  then  find 
it  impossible  to  make  good  their  promises  of  future 
payment.  It  is  claimed  by  some  that  optimism  and 
pessimism  run  in  waves,  and  that  periods  of  over- 
buying are  followed  by  periods  of  depression,  when 
everyone  is  afraid  to  allow  further  postponement  of 
payment.  Everyone  owing  money  will  then  try  to 
sell,  with  the  result  that  business  becomes  disorgan- 
ized. Prices  decline  sharply,  Thanks  are  called  upon 
to  produce  cash,  and  a  panic  results.  The  only  way 
in  which  such  a  panic  can  be  avoided  is  by  a  limita- 
tion and  a  careful  scrutiny  of  new  credit,  and  an  ex- 
tension and  gradual  liquidation  of  the  old  credit. 
If  given  time  the  situation  will  right  itself. 

The  Note  Broker.  Much  of  the  commercial  paper 
is  sold  not  directly  to  banks  but  through  note  brokers. 
These  are  men  who  have  made  a  special  study  of  this 
kind  of  investment,  and  are  in  touch  with  banks  in 
different  sections  of  the  country.  The  bank,  to  a 
large  extent,  relies  upon  the  judgment  of  the  broker 
from  whom  it  buys  commercial  paper  and  is  thereby 
saved  the  time  and  expense  of  an  investigation. 
The  notes  range  in  value  from  $2,000  to  $200,000. 

The  Credit  Man.  It  is  very  difficult  to  know 
whether  to  allow  credit  to  a  certain  person  or  a  firm, 
and  for  what  amount.  In  all  large  commercial  con- 
cerns and  also  in  many  banks  there  is  a  special  official 
who  is  charged  with  the  duty  to  decide  these  difficult 


BUSINESS     ORGANIZATION  7I 

problems.  He  is  called  the  credit  man.  The  credit 
man  gets  his  information  through  various  channels. 
He  may  obtain  it  through  the  traveling  salesmen  of 
the  firm  who  are  required  to  report  upon  such  mat- 
ters, and  who  gather  their  information  from  observa- 
tion, and  from  conversation  with  the  customers  and 
others  acquainted  with  the  local  business  conditions. 
Some  credit  men  place  very  little  confidence  in  these 
reports  because  salesmen  frequently  lack  the  knowl- 
edge and  the  analytical  mind  necessary  to  come  to 
sound  conclusions  in  credit  matters. 

He  may  get  his  information  from  the  banks.  This 
method  cannot  be  very  successful  for  more  than  one 
reason.  The  bank  does  not  necessarily  know  the 
financial  condition  of  the  firm,  but  more  than  that, 
even  if  the  bank  did  know,  the  relations  between 
bank  and  customer  are  somewha:t  of  a  private  nature, 
and  banks  often  feel  that  they  would  be  committing 
a  breach  of  confidence  in  giving  the  information 
asked  for. 

The  next  method  is  to  use  the  reports  of  the  mer- 
cantile agents.  There  are  two  important  agencies  in 
the  United  States :  R.  G.  Dun  and  Company,  and  the 
Bradstreet  Company.  Both  of  these  agencies  inves- 
tigate the  credit  of  firms  and  individuals,  and  gather 
data  regarding  their  business  experience  and  reputa- 
tion and  the  amount  of  capital  invested.  The  infor- 
mation collected  by  these  agents  is  published  in 
books  issued  quarterly  to  subscribers.    These  volumes 


72 


BUSINESS     ORGANIZATION 


contain  some  1,900,000  names  arranged  alphabeti- 
cally under  the  names  of  the  cities.  Behind  the 
names  of  the  firms  appear  symbols  constituting  the 
ratings  which  indicate  the  estimated  net  worth  of  the 
firm  and  its  past  record  of  business  ability  and  hon- 
esty. The  symbols  of  R.  G.  Dun  and  Company  are 
arranged  as  follows: 

KEY  TO  RATINGS 


LEFT-HAND  COLUMN 


RIGHT-HAND  COLUMN 


ESTIMATED  PECUNIARY 
STRENGTH 


GENERAL  CREDIT 


High 


Good 


Fair 


Limited 


AA 

A-l- 

A 

BH- 

B 

C-H 

C 

D-i- 

D 

E 

F 

G 

H 

J 

K 

L 

M 


Over  $1,000,000 

Over  $750,000 

$500,000  to  $750,000. 

300,000  to    500,000. 

»  200,000  to    300,000. 

125,000  to    200,000. 

75,000  to    125,000. 

50,000  to      75,000. 

35,000  to      50,000. 

20,000  to      35,000. 

10,000  to      20,000. 

5,000  to       10,000. 

3,000  to        5,000. 

2,000  to        3,000. 

1,000  to        2,000. 

500  to         1,000. 

Less  than  500. 


Ai 
Ai 
Ai 

I 

I 

I 

I; 

I; 

I; 

2 

2; 


iK 
2 
2 
2 

2K 

2K 
2K 

3 

zH 

3K 

sK 
sK 

3M 
3K 
3K 


2 
2 
2 

2K 

2K 

3 
3 
3 

3M 

4 

4 

4 

4 

4 

4 

4 


When 
line  of 


only  a  credit  rating  appears  this 
credit  designation  applies 


(rf)  Where  an  italic  d  in  parenthesis  precedes  a  rating,  it  is  an  indi- 
cation that  one  or  more  of  the  partners  in  the  firm  are  liable  in  another 
or  other  firms,  and  the  responsibility  is  in  that  sense  divided,  thus: 
id)     B+i. 


BUSINESS     ORGANIZATION  73 

The  absence  of  a  Rating,  whether  of  capital  or  credit,  indicates  those 
whose  business  and  investments  render  it  difficult  to  rate  satisfactorily. 
We  therefore  prefer,  in  justice  to  these,  to  give  the  detailed  reports  on 
record  at  our  Offices. 

Ratings  of  branch  houses  should  be  looked  up  at  Headquarters  also 

R.  G.  Dun  &  Co. 


These  general  reports  may  be  supplemented  by 
means  of  special  reports  from  the  agency  which  are 
furnished  to  subscribers  upon  request  and  are  much 
more  detailed  and  specific. 

In  addition  to  these  commercial  agencies  there  are 
established  a  number  of  co-operative  credit  informa- 
tion undertakings,  such  as  the  various  local  credit 
men's  associations,  which  exchange  information  upon 
requests  from  members. 

Summary.  The  amount  of  working  capital  needed 
in  any  business  depends  upon  many  factors:  the 
rapidity  of  turnover,  the  terms  of  sale  and  purchase, 
the  length  of  the  manufacturing  process,  and  the 
seasonal  fluctuations.  More  working  capital  may  be 
secured  by: 

1.  Postponing  payment  on  purchases. 

2.  By  borrowing  from  banks  on  promissory  notes,  with 

or  without  collateral   (collateral  may  be  stocks, 
bonds,  or  merchandise). 

3.  By  discounting  a  bill  of  exchange  or  draft.     Such 

drafts  are  made  more  marketable  by  acceptance, 
either  by  merchants  or  banks. 


74  BUSINESS     ORGANIZATION 

Note  brokers  act  as  middlemen  between  borrower 
and  lender.  The  credit  man  supervises  loans  and  per- 
forms an  important  service  in  the  business  enterprise. 

REFERENCES 

Same  as  preceding  chapter.    Additional  references: 

F.  A.  Cleveland.  Funds  and  Their  Uses.  D.  Appleton  and 
Company. 

J.  E.  Hagerty.  Mercantile  Credit.  Henry  Holt  and  Com- 
pany. 

W.  A.  Prendergast.  Credit  and  Its  Uses,  D.  Appleton 
and  Company. 

A.  W.  Douglas.  Merchandising.  The  Macmillan  Com- 
pany. 

QUESTIONS  FOR  FURTHER  STUDY 

1.  Can  you  see  any  good  reason  why  in  figuring  the 
turnover  it  is  necessary  to  use  sales  price  or  retail 
price,  both  for  the  total  sales  and  for  the  valuation  of 
stock  on  hand? 

Reference:   Prendergast.    Chapter  VH I. 

2.  How  much  does  a  firm  lose  when  it  can  earn  lo  per 
cent  a  year  on  its  working  capital,  and  it  neglects  to  take 
advantage  of  a  cash  discount  of  6  per  cent  within  ten 
days  on  a  purchase  of  $2,000  payable  in  60  days? 

3.  How  is  a  note  protested? 
Reference:   Cleveland.    Chapter  VH. 

4.  How  are  credit  accounts  collected? 
Reference:   Cleveland.    Chapter  VH. 

5.  What  are  the  special  financial  problems  involved  in 
selling  on  installments? 

Reference:   Lough.    Part  IV.    Chapter  XVH. 


BUSINESS     ORGANIZATION  75 

6.  Explain  how  the  experience  of  the  Westlnghouse 
Electric  and  Manufacturing  Company  illustrates  the 
necessity  of  extreme  care  in  the  investment  of  capital 
funds. 

Reference:  Lough.    Part  IV,  Chapters  XVI,  XVII. 

TEST  QUESTIONS 

1.  It  is  sometimes  said  that  a  society  where  all  pay- 
ments are  made  in  cash  is  a  "static  society"  and  that  a 
society  where  transactions  are  carried  on  by  credit  is  a 
"dynamic  society."  (Static  means  stationary,  not  sub- 
ject to  expansion.  Dynamic  means  growing,  expanding.) 
Can  you  explain  this  statement? 

2.  Enumerate  the  various  ways  in  which  a  merchant 
may  secure  the  use  of  more  working  capital. 

3.  What  are  the  different  kinds  of  security  which  one 
may  offer  a  bank  when  making  a  k)an? 

4.  What  is  a  trade  acceptance  and  what  a  bank 
acceptance? 

5.  What  are  the  duties  of  a  credit  man  and  how  does 
he  secure  his  information? 

6.  What  is  meant  by  a  credit  rating? 


76  BUSINESS     ORGANIZATION 


CHAPTER  V 

FINANCING  AN  ENTERPRISE 
(Borrowing  on  Long  Time) 

Problems  of  Financing  a  Growing  Business.  A 
business  may  be  seriously  handicapped  and  even  in 
danger  of  financial  failure  from  an  insufficient  amount 
of  working  capital.  But  as  we  have  seen,  many 
avenues  are  open  to  supply  the  need  by  means  of 
borrowed  money. 

A  firm  is  also  handicapped  when  it  has  insufficient 
capital  investment,  when  its  factory  is  too  small,  its 
delivery  equipment  inadequate,  or  when  its  machin- 
ery is  out  of  date.  The  effect  is  not  likely  to  be  as 
disastrous  as  when  the  working  capital  is  insufficient 
and  will  in  most  cases  be  confined  to  a  checking  of 
the  further  development  of  the  enterprise.  The 
owners,  anxious  to  supply  the  undertaking  with  the 
necessary  funds,  may  follow  two  methods.  They 
may  borrow  on  long  time,  or  they  may  enlarge  the 
amount  of  proprietorship  funds,  either  by  investing 
more  themselves  or  by  inviting  others  to  become 
part  owners. 

Advantages  of  Borrowing  on  Long  Time,  Borrow- 
ing has  one  advantage  which  the  other  method  does 
not  possess.    It  supplies  new  capital  without  taxing 


BUSINESS     ORGANIZATION  77 

the  resources  of  existing  owners,  and  it  does  not  in- 
crease their  number,  which  would  result  in  a  decrease 
in  the  share  of  the  total  profits  falling  to  the  original 
owners. 

Suppose  that  a  firm,  whether  a  single  ownership, 
partnership,  or  corporation  does  not  matter,  has 
$100,000  capital  and  is  making  lo  per  cent  on  its 
investment  a  year.  Suppose  that  the  business  de- 
mands an  investment  of  $150,000,  and  suppose  that 
the  firm  then  makes  9  per  cent  on  its  total  invest- 
ment. It  must  then  be  plain  that  the  original  owners 
would  have  been  wise  to  secure  the  addition  in  capital 
by  borrowing  money  at  5  or  6  per  cent,  rather  than 
to  invite  in  new  shareholders  or  partners.  Had  they 
invited  in  new  owners  then  they  would  have  reduced 
the  yearly  income  on  their  original  investment  from 
$10,000  to  $9,000.  By  borrowing  funds  at  the  rate  of 
6  per  cent  a  year  they  improved  their  financial 
returns,  for  of  the  total  earnings  which  amount  to 
$i3»500,  only  6  per  cent  of  $50,000 — or  $3,000 — 
goes  to  those  who  supplied  the  new  funds;  $10,500  is, 
therefore,  left  to  the  original  owners,  who  instead  of 
receiving  10  per  cent  on  their  investment  now  make 
10.5  per  cent. 

Disadvantages  of  Borrowing  on  Long  Time,  There 
is,  however,  one  great  disadvantage  attached  to  this 
method  of  raising  funds.  The  yearly  interest  charge 
may  become  a  heavy  burden  upon  the  concern.  The 
owners  of  a  business  have  no  right  to  demand  any- 


78  BUSINESS     ORGANIZATION 

thing  as  a  return  from  a  business  unless  it  is  earned, 
and  in  case  of  a  corporation,  not  unless  the  board  of 
directors  have  declared  the  earnings  available  for 
distribution.  It  is  different  with  the  interest  pay- 
ment on  borrowed  money;  this  falls  due  every  year 
or  every  half  year  or  quarter,  whether  the  business 
prospers  or  not.  If  anything  goes  wrong,  this  pay- 
ment may  become  a  heavy  burden  and  may  lead  to 
disaster. 

Need  for  Security,  Nor  will  it  be  possible  to  obtain 
money  on  loan  for  a  long  period  without  offering 
good  and  unmistakable  security.  The  situation  is 
quite  different  from  securing  working  capital.  The 
mercantile  loans  or  bank  loans  discussed  in  the  last 
chapter  are  all  for  short  periods — thirty,  sixty,  and 
ninety  days.  A  keen  business  man  can  look  that  far 
ahead,  or  at  least  he  believes  he  Ccin,  which  amounts 
to  the  same  thing.  When  a  loan  is  asked  for  ten, 
twenty,  fifty  years  or  even  longer,  too  many  uncer- 
tainties enter  in  which  make  it  necessary  to  ask  for 
good  security.  This  security  is  usually  given  in  the 
form  of  a  special  right  or  lien  on  a  specific  piece  of 
property,  sometimes  on  property  already  in  existence, 
at  other  times  on  property  to  be  bought  with  the 
funds  made  available  by  the  loan.  The  owners 
thereby  sacrifice  the  right  of  free  disposal  of  their 
property. 

The  Mortgage,  This  right  or  lien  is  usually  evi- 
denced by  a  contract  called  a  mortgage,    A  mortgage 


BUSINESS     ORGANIZATION  79 

is  a  contract  of  sale,  but  a  conditional  sale  which  be- 
comes automatically  void  upon  the  payment  of  the 
loan  with  interest  upon  the  date  of  maturity.  The 
loan  itself  is  evidenced  by  a  promissory  note,  in  every 
respect  like  an  ordinary  note  of  that  kind,  but  at  the 
bottom  of  which  are  affixed  the  words,  "This  note  is 
secured  by  mortgage  of  even  date  herewith."  The 
amount  borrowed,  the  rate  of  interest,  the  maturity 
of  interest  and  principal,  are  all  mentioned  in  the 
note.  What  is  commonly  called  a  mortgage  consists, 
therefore,  of  two  documents,  the  contract  of  con- 
ditional sale,  and  the  promissory  note. 

Should  the  borrower  fail  to  pay  interest  as  agreed 
upon  or  should  he  fail  to  pay  the  principal  when  due, 
then  the  holder  of  the  note  and  the  mortgage  has  the 
right  to  take  possession  of  the  property  and  to 
operate  it  for  his  benefit  or  to  sell  it  as  the  case  may 
be.    This  is  called  foreclosure  of  the  mortgage. 

The  Bond  Issue.  As  long  as  the  amount  of  money 
which  is  involved  is  not  very  large  the  borrower  will 
not  have  very  great  difficulty  in  finding  someone  to 
lend  him  the  funds,  provided  the  security  offered  is 
above  question.  One  reason  why  a  comparatively 
high  rate  of  interest  is  charged  for  such  loans  is  that 
mortgages  are  not  readily  marketable.  They  are  for 
odd  amounts  and  the  security  is  only  locally  known. 
The  larger  the  amount,  the  more  difficult  it  becomes 
to  find  anyone  willing  to  invest  that  much  in  one 
kind  of  security. 


8o  BUSINESS     ORGANIZATION 

This  objection  is  met  by  the  subdivision  of  the 
promissory  note  into  a  number  of  convenient  denomi- 
nations such  as  $100,  $500,  or  $1,000  each.  Such 
notes  are  called  bonds.  The  only  difference,  then,, 
between  a  promissory  note  secured  by  a  mortgage,, 
and  a  bond  secured  in  the  same  way,  is  that  the  bond 
is  one  of  a  series  all  of  which  together  take  the  place 
of  the  promissory  note. 

The  Trust  Company.  When  there  is  one  promis- 
sory note,  the  lender  holds  the  note  and  the  mortgage. 
The  mortgage  or  conditional  sale  is  recorded  at  the 
courthouse,  and  the  lender  may  feel  certain  that  no 
other  loan  will  be  made  which  may  endanger  his 
rights.  It  is  different  when  instead  of  one  note  there 
are  a  large  number  of  bonds,  and  when  these  are 
sold  in  widely  scattered  places.  The  first  problem  is 
who  shall  hold  the  mortgage,  and  the  next  problem 
is  who  shall  see  to  it  that  no  more  bonds  are  issued 
than  are  called  for  in  the  agreement. 

The  trust  company  here  steps  in  to  fill  this  need. 
This  trust  cojnpany  must  not  be  confused  with  the 
trust  organizations  referred  to  so  frequently  in  the 
newspapers,  such  as  the  tobacco  trust,  the  liquor 
trust,  or  the  steel  trust.  The  trust  company  here  re- 
ferred to  is  a  banking  institution.  It  differs  from  a 
commercial  bank  in  that  it  does  not  usually  handle 
checking  accounts,  but  deals  principally  in  time  de- 
posits and  long-time  investments.  It  performs,  how- 
ever, the  services  of  a  bank  in  bringing  together  the 


BUSINESS     ORGANIZATION  8l 

borrower  and  the  lender,  and  in  lending  its  name, 
reputation,  and  credit. 

Usually  a  trust  company  is  appointed  to  represent 
the  lenders,  to  act  in  the  nature  of  a  trustee,  though 
this  function  may  be  performed  by  other  institutions 
or  by  a  private  individual.  The  duties  of  the  trustee 
are  to  hold  the  mortgage,  which  in  the  case  of  a  bond 
issue  is  usually  called  a  deed  of  trusty  to  see  to  it  that 
no  bonds  are  issued  in  excess  of  the  value  of  the  loan 
to  be  consummated,  and  to  protect  the  interests  of 
the  bondholders.  From  this  it  might  be  inferred  that 
the  trustee  is  appointed  by  the  bondholders.  This 
is  not  usually  the  case.  In  the  case  of  corporation 
bonds  the  trust  company  is,  as  a  rule,  appointed  by 
the  corporation. 

Closed  and  Open  Mortgages,  Usually,  when  selling 
bonds  secured  by  a  mortgage,  the  amount  to  be  sold 
is  publicly  announced,  and  it  is  agreed  that  even 
though  the  value  of  the  property  may  far  exceed  the 
amount  of  the  loan,  no  additional  bonds  shall  be 
issued  under  the  same  mortgage.  sThis  is  called  a 
closed  mortgage. 

Sometimes,  however,  in  order  to  leave  an  opening 
for  raising  funds  in  the  future  on  the  same  security, 
the  amount  to  be  issued  is  not  definitely  limited  and 
may  be  increased  at  a  later  time.  This  is  called  an 
open  mortgage.  Railroads  sometimes  issue  bonds  in 
this  way  and  limit  the  amount  to  be  issued  by  a  fixed 


82  BUSINESS     ORGANIZATION 

rate  per  mile  of  track.  Such  open  mortgages  may 
lead  to  many  abuses. 

Once  a  bond  issue  has  been  sold  against  a  closed 
mortgage  on  a  piece  of  property,  it  is  possible  to  use 
that  same  security  again  for  the  same  purpose.  The 
right  to  a  first  claim  on  the  security,  however,  can- 
not be  taken  away  from  the  original  bondholders; 
they  hold  the  first  mortgage  bonds,  while  later  issues 
based  on  the  same  security  will  be  known  as  second, 
third,  or  even  fourth  mortgage  bonds.  The  later 
issues  do  not  in  this  case  affect  the  rights  of  the  pre- 
ceding ones. 

Equipment  Trust  Bonds.  A  mortgage  or  deed  of 
trust  on  immovable  property  is  but  one  of  several 
ways  of  off"ering  security  to  the  bondholders.  Equip- 
ment trust  bonds  are  bonds  based  upon  the  security 
of  equipment,  such  as  machinery,  railroad  cars,  street 
cars,  or  locomotives.  Such  bonds  usually  arise  as 
follows:  Suppose  a  street  car  company  needs  new 
cars  but  has  no  available  funds.  It  must  then  borrow 
the  money.  A  trustee  is  appointed  to  buy  the  cars, 
to  issue  bonds  to  finance  the  purchase,  and  to  lease 
these  cars  to  the  street  car  company.  The  trustee 
may  be  a  trust  company  or  may  be  a  corporation 
formed  solely  for  this  purpose.  The  cars  remain  the 
property  of  the  trustee  and  are  merely  leased  to  the 
company  in  order  to  protect  the  bondholders.  The 
yearly  rental  to  be  paid  by  the  company  must  cover 
the  interest  due  to  bondholders,  expenses  of  adminis- 


BUSINESS     ORGANIZATION  83 

tration,  and  enough  more  to  accumulate  within  the 
period  of  life  of  the  cars,  a  fund  sufficient  to  pay  off 
the  principal  of  the  debt. 

Collateral  Trust  Bonds,  Another  type  of  bonds 
exists  which  bears  very  close  resemblance  to  the 
promissory  notes  discussed  in  the  preceding  chapter. 
These  are  the  collateral  trust  bonds.  They  are  issued 
against  a  deposit  of  collateral.  This  method  of  issu- 
ing bonds  is  often  used  by  public  utility  companies. 
Many  railroad  systems  are  composed  of  a  number  of 
branch  lines.  In  order  to  concentrate  and  sometimes 
in  order  to  acquire  the  ownership  of  the  obligations 
of  these  subsidiary  lines,  railroad  companies  fre- 
quently place  the  bonds  of  these  lines  in  the  hands 
of  a  trust  company,  and  issue  new  bonds  against 
them  as  security. 

The  well-known  credit  of  the  large  or  parent  com- 
pany frequently  causes  these  collateral  trust  bonds 
to  sell  for  a  higher  price  than  the  value  of  the  collat- 
eral would  justify. 

The  Income  Bond.  What  makes  bonds  secured  by 
the  methods  just  described  attractive  as  an  invest- 
ment, is  the  fact  that  they  hold  out  guarantees  both 
in  regard  to  the  regularity  of  income  and  to  the  ulti- 
mate repayment  of  the  principal.  Income  bonds, 
though  secured  as  to  the  principal,  Jiold  out  no 
promise  of  a  regular  rate.  They  receive  their  income 
only  if  it  is  earned.  In  so  far  they  are  no  better  than 
a  share  of  stock,  except  for  the  mortgage  lien.    As  a 


84  BUSINESS     ORGi^NIZATION 

matter  of  fact,  the  income  bond  is  a  good  deal  less 
desirable  than  a  share  of  stock,  for  the  stockholders 
will  postpone  payment  of  interest  on  these  bonds  as 
long  as  they  can,  either  until  the  bonds  mature,  or 
until  enough  has  accumulated  to  allow  the  stock- 
holders  to  share  in  the  division  of  income.  The  bond 
may  wait  a  long  time  for  a  return  and  does  not  hold 
out  the  possibilities  of  a  large  return  in  the  future. 
A  stockholder  as  part-owner,  shares  in  the  profits,, 
a  bondholder  can  never  get  more  than  the  interest 
promised  him  in  the  bond. 

The  Debenture  Bond.  While  the  income  bond  gives 
no  certainty  in  regard  to  income,  the  debenture  bond 
fails  to  give  the  certainty  in  regard  to  principal  which 
other  bonds  offer.  A  debenture  bond  is  no  other 
than  a  promise  to  pay  a  certain  amount  of  money  at 
a  certain  time  and  to  pay  interest  for  its  use.  In 
most  cases  the  debenture  bond  is  protected  by  some 
special  right  or  power  which  is  intended  to  guarantee 
regular  payment  of  income.  Usually  a  clause  is  in- 
serted in  the  bond  stating  that  the  principal  becomes 
due  automatically  upon  default  in  payment  of  the 
interest. 

The  Life  of  Bonds,  The  life  of  bonds  varies  greatly. 
Some  are  issued  for  short  periods  of  five  or  ten  years 
and  others  for  fifty  years  or  longer.  As  a  rule,  indus- 
trial companies  do  not  issue  bonds  for  longer  than 
about  twenty-five  or  thirty  years.  In  many  cases, 
companies    will    refund    their    bonds    at  maturity. 


BUSINESS     ORGANIZATION  85 

When  a  favorable  interest  rate  can  be  secured  the 
company  may  prefer  not  to  withdraw  the  money 
from  business,  but  to  pay  off  the  old  loan  with  the 
proceeds  of  a  new  bond  issue.  This  process  is  called 
refunding  a  loan. 

The  total  debt  represented  by  bonds  is  called  the 
funded  or  permanent  debt.  Short-term  loans  may  be 
referred  to  as  unfunded.  The  only  difference  be- 
tween these  two  classes  of  liabilities  is  the  length  of 
the  period  for  which  the  loan  is  made. 

The  Price  of  Bonds.  Suppose  that  in  order  to  raise 
$100,000  a  thousand  bonds  of  $ioo  each  are  issued; 
how  much  interest  must  be  promised  in  order  to  sell 
these  bonds  for  $ioo  each?  That  depends  first  of  all 
upon  the  interest  which  other  loans  like  it  are  offer- 
ing, and  also  upon  the  confidence  which  the  public, 
or  the  small  group  of  possible  investors,  has  in  the 
security  offered.  The  less  confidence  they  have  in  it, 
the  higher  the  interest  rate  that  must  be  offered  in 
order  to  persuade  them  to  pay  $ioo  for  the  bonds. 
This  $100  is  called  the  face  value  of  the  bonds  be- 
cause it  is  the  amount  printed  on  the  face  of  the  cer- 
tificate. When  a  bond  sells  for  its  face  value  we  say 
that  it  sells  at  par. 

Many  bonds  sell  below  par.  This  may  result  from 
a  combination  of  causes.  In  most  cases  it  will  indi- 
cate that  at  the  same  rate  of  interest  other  and  safer 
security  can  be  found.  It  is  interesting  to  note  that 
to  the  company  which  issues  the  bonds,  selling  below 


86  BUSINESS     ORGANIZATION 

par  is  quite  as  expensive  as  promising  a  higher  rate 
of  interest.  That  the  company  sells  below  par  rather 
than  raises  the  interest  rate  may  be  merely  the 
result  of  miscalculation. 

Suppose  that  the  issue  referred  to  above  of  one 
thousand  bonds  of  $ioo  each  would  sell  at  par  when 
promising  6  per  cent.  Then  it  is  certain  that  the 
price  would  decline  below  par  if  only  5  per  cent  were 
offered.  How  much  below  cannot  be  determined  un- 
til we  know  the  life  of  the  bond.  The  reasoning  of 
the  lender  of  money,  i,  e.,  the  investor  who  buys  the 
bonds,  is  as  follows:  "I  can  get  6  per  cent  on  my 
money  on  perfectly  good  security,  as  good  as  of  any 
issue  like  it  promising  6  per  cent.  I  am,  therefore, 
interested  in  investing  in  this  bond  issue,  but  only 
on  condition  that  I  can  make  6  per  cent  on  my 
money.  Suppose  now  that  the  investment  were  for- 
ever, that  the  bonds  never  matured,  then  I  have 
only  my  yearly  rate  to  consider.  I  want  6  per  cent, 
or  $6  on  every  $100.  One  of  these  bonds  pays  $5  a 
year;  that  means  an  equivalent  of  6  per  cent  on 
$83.33.  Leaving  the  question  of  the  principal  out  of 
consideration,  therefore,  as  far  as  yearly  income  is 
concerned,  that  bond  is  worth  $83.33." 

He  can  afford  to  pay  more,  however,  because  when 
he  buys  the  bond  he  not  only  buys  income,  but  also 
$100  sometime  in  the  future.  In  other  words,  he 
buys  an  addition  of  ^16.67  to  his  invested  capital. 
The  sooner  this  event  takes  place,  the  more  he  will  be 


BUSINESS     ORGANIZATION  87 

willing  to  pay  for  the  bond.  Bond  buyers  will, 
therefore,  increase  the  amount  they  are  willing  to 
pay  with  regard  to  the  date  of  maturity  of  the  bonds. 

In  buying  bonds  the  investor  considers,  therefore, 
two  things:  First  of  all  the  rate,  that  is,  the  rate  of 
interest  promised ;  but  of  most  direct  interest  to  him 
is  the  yield.  This  is  the  actual  rate  of  interest  earned 
by  the  money  invested  in  the  bond  when  bought  at 
the  current  market  price.  The  yield  consists  of  two 
factors:  First,-  the  yearly  return  on  the  investment 
resulting  from  the  regular  interest  payments;  and 
second,  the  difference  between  the  price  paid  for  the 
bond  and  the  par  value,  expressed  in  terms  of  a 
yearly  payment  for  the  period  ending  at  the  date  of 
maturity  of  the  bonds. 

In  order  to  figure  this  yield  it  is  necessary  to  use 
difficult  algebraic  formulas  and  we  shall  not  enter 
into  that  question  here.  For  the  use  of  investors  and 
bcinkers  many  bond  tables  are  available  from  which 
one  may  read  off  quickly  the  net  yield  of  bonds  of 
almost  any  market  price,  rate,  and  maturity.  When 
bonds  are  selling  above  par  the  yield  may  be  calcu- 
lated in  a  similar  way.  This  yield  will  then  be  less 
than  the  promised  rate  of  interest. 

The  Repayment  of  Bonds,  Upon  the  borrower  rest 
two  responsibilities.  He  must  pay  the  interest  regu- 
larly and  he  must  be  prepared  to  pay  off  the  principal 
when  the  bonds  fall  due.  Many  corporations  are 
compelled  to  refund  their  bonds  because  they  have 


88  BUSINESS     ORGANIZATION 

made  no  adequate  preparation  for  paying  off  their 
debt  at  maturity. 

When  the  security  upon  which  the  bond  issue  rests 
remains  unimpaired  or  increases  in  value,  failure  to 
provide  for  redemption  is  not  a  very  serious  matter 
though  it  may  lead  to  difficulties.  A  railroad  keeps 
up  its  roadbed  by  constant  repairs  and  renewals, 
while  the  right  to  use  the  roadbed,  i,  e.,  the  fran- 
chise, is  usually  perpetual  and  increases  in  value 
year  by  year.  A  mortgage  on  a  roadbed  is,  there- 
fore, excellent  security  and  refunding  can  take  place 
comparatively  easily. 

The  situation  becomes  different  when  the  security 
consists  of  assets  which  decline  in  value.  Declining 
or  depreciating  values  are :  rolling  stock  of  a  railroad 
or  street-car  line,  mining  property,  forest  lands, 
houses,  and  machinery.  Where  such  security  is 
offered  as  collateral,  two  conditions  must  be  fulfilled : 
first,  the  bonds  must  not  have  a  longer  life  than  the 
estimated  life  of  the  assets;  second,  during  the  life 
of  the  bond  a  fund  must  be  accumulated  which  will 
make  redemption  at  maturity  certain.  Such  a  fund 
is  called  an  amortization  fund  and  the  process  of 
accumulation  is  called  amortization.  Here  again, 
compound  interest  calculations  must  be  used  to 
determine  what  yearly  sum  shall  be  set  aside  to 
accomplish  the  desired  end. 

Summary.  The  problem  of  securing  the  necessary 
funds  for  permanent  investments,  i.  e.,  capital  in- 


BUSINESS     ORGANIZATION  89 

vestments,  is  also  important.  These  funds  may  be 
secured  by  taking  in  new  partners,  which  means  an 
increase  in  the  claimants  when  profits  are  to  be 
divided,  or  by  borrowing  on  long  time.  The  latter  is 
often  to  be  preferred.  It  may  be  necessary  to  give 
security.  A  mortgage  is  such  security.  Where  large 
amounts  are  needed  a  bond  issue  may  be  floated. 
There  are  various  types  of  bonds.  They  differ 
according  to  the  security  offered  for  the  payment  of 
interest  or  for  the  ultimate  redemption  of  the  loan. 
The  life  of  bonds  varies  but  is  usually  more  than  ten 
years.  The  factors  which  influence  the  price  at 
which  bonds  will  sell  are:  condition  of  the  money 
market,  rate  of  interest  and  kind  of  security  offered, 
and  life  of  the  bonds. 

REFERENCES 

The  same  as  the  preceding  chapters. 

QUESTIONS  FOR  FURTHER  STUDY 

1.  What  various  methods  are  open  by  which  capital 
funds  may  be  increased  ? 

Reference:   Lough.    Part  III,  chapter  IX. 
Cleveland.    Chapter  VIII. 

2.  Enumerate  and  explain  the  character  of  the  various 
kinds  of  long-time  paper. 

Reference:   Cleveland.    Chapter  VIII. 

3.  What  are  the  chief  advantages  of  entrusting  the 
administration  of  bond  issues  to  a  trust  company? 

Reference:   Cleveland.    Chapter  XIII. 


90  BUSINESS     ORGANIZATION 

TEST  QUESTIONS 

1.  What  is  the  chief  disadvantage  of  borrowing  on 
long  time? 

2.  Describe  what  documents  make  up  what  is  usually 
called  a  mortgage? 

3.  What  is  a  trust  company? 

4.  Enumerate  and  explain  the  character  of  the  dif- 
ferent types  of  bonds  mentioned  in  this  chapter. 

5.  What  factors  determine  the  price  of  bonds? 

6.  What  will  be  the  effect  of  an  increase  in  the  average 
rate  of  interest  upon  the  price  of  bonds? 


BUSINESS     ORGANIZATION  9I 


CHAPTER  VI 

FINANCIAL  INSTITUTIONS 

The  Bank.  Many  institutions  and  business  under- 
takings place  their  resources  and  financial  experience 
at  the  disposal  of  the  business  men  and  aid  them  in 
financing  their  business.  Among  these  institutions 
the  banks  have  a  first  claim  to  our  attention.  There 
are  two  classes  of  banks:  commercial  and  non- 
commercial. Commercial  bamks  are  of  the  greatest 
interest  to  business  men.  These  are  banks  which 
confine  themselves  largely  to  short-term  transactions. 
They  logically  become  the  depository  for  accounts 
subject  to  check,  and  aid  in  the  financing  of  domestic 
and  foreign  business  transactions  by  discounting 
commercial  paper. 

There  are  a  large  number  of  financial  institutions 
which  are  classified  as  non-commercial  bainks. 
These  are: 

1.  Loan  and  trust  companies 

2.  Savings  banks 

3.  Insurance  companies 

The  Commercial  Banks,  The  relations  of  the 
commercial  banks  to  the  business  world  have  been 
discussed  in  the  chapter  on  Working  Capital.  Their 
main  function  is  to  aid  business  by  their  credit 


92  BUSINESS     ORGANIZATION 

facilities,  to  mobilize  the  financial  resources  of  the 
community,  and  to  receive  on  deposit  funds  mo- 
mentarily idle. 

It  is  very  important  that  business  men  should 
understand  the  essentials  of  the  operation  of  a  bank. 
Commercial  banks  may  be  national,  state,  or  private. 
National  banks  operate  under  a  national  charter, 
state  banks  under  a  state  charter,  while  private 
banks  are  unincorporated.  The  large  private  banks 
are  engaged  mostly  in  the  promoting  and  financing 
of  enterprises  and  either  do  not  carry  on  any  com- 
mercial banking  business  or  do  so  only  incidentally. 

Large  commercial  banks  consist  of  many  depart- 
ments. One  prominent  New  York  City  bank  is 
composed  of  the  following  departments:  New  York 
City  accounts,  out  of  town  accounts,  credit,  new 
business,  foreign  business,  securities,  operation, 
and  auditing  departments. 

The  chief  executive  officers  are  usually  a  president 
with  a  number  of  vice-presidents.  They  direct  the 
policy  of  the  bank  and  constitute  the  link  between 
the  outside  world  and  the  bank  proper.  The  opera- 
tion of  the  bank  is  entrusted  to  a  cashier  and  a 
number  of  assistant  cashiers.  They  are  assisted  by  a 
large  number  of  clerks  and  tellers. 

The  Making  of  a  Deposit,  When  a  new  customer 
presents  himself  at  the  bank  and  desires  to  make  a 
deposit,  i.  e.,  to  open  an  account,  he  is  directed  to  the 
cashier,  assistant  cashier,  or  one  of  the  vice-presidents, 


BUSINESS     ORGANIZATION  93 

whichever  one  of  these  Is  in  charge  of  new  customers. 
He  must  be  properly  introduced  by  a  customer  in 
good  standing.  The  bank  looks  upon  each  customer 
as  a  potential  borrower,  and  it  is  therefore  important 
that  none  but  reliable  people  be  allowed  to  open 
accounts. 

The  depositor  has  a  right  to  issue  checks.  Since 
the  handling  of  such  checks  and  the  keeping  of  the 
customers'  accounts  requires  the  time  of  the  bank's 
employees,  and  is  therefore  costly,  banks  usually 
require  a  minimum  deposit.  In  case  accounts  are 
allowed  to  fall  below  this  minimum,  a  charge  is  made 
for  the  services  of  the  bank.  Such  a  minimum  may  be 
as  low  as  $25,  but  in  some  banks  is  as  high  as  $5,000. 
The  banks  figure  that  unless  the  deposit  is  large  the 
interest  which  the  bank  can  earn  by  using  this 
money  as  a  basis  for  loans  does  not  offset  the  cost  of 
handling  the  account. 

The  depositor  now  makes  out  a  signature  card 
which  is  kept  as  a  record  in  the  bank  to  enable  the 
tellers  to  compare  it  with  the  signature  appearing 
on  the  checks.  If  the  bank  does  not  use  "due  care 
and  diligence"  In  making  payment,  and  it  should 
pay  a  check  with  a  forged  signature,  the  bank  would 
have  to  bear  the  loss. 

The  next  step  is  to  make  the  deposit.  The  cus- 
tomer must  fill  out  a  deposit  slip  upon  which  the 
various  kinds  of  cash  items  which  may  be  deposited 
are  listed  separately.    He  inserts  his  name  and  the 


94  BUSINESS     ORGANIZATION 

date  and  presents  the  slip  at  the  receiving  teller*s 
window  with  the  money,  checks,  or  coupons  which 
he  intends  to  deposit.  This  deposit  sHp  is  a  valuable 
record  which  the  bank  keeps  as  evidence  that  a 
certain  amount  was  deposited.  Should  any  difficulty 
arise,  the  slip  made  out  by  the  customer  himself  and 
accepted  as  correct  by  the  bank  would  quickly 
settle  the  question. 

The  customer  receives  as  his  receipt  a  pass  book. 
Formerly  this  pass  book  was  presented  at  the  bank 
once  a  month,  or  less  frequently  in  order  to  enable 
the  bookkeeper  to  enter  the  withdrawals  and  to 
balance  the  book.  Practically  all  banks  now  use  the 
statement  which  is  a  monthly  account  of  deposits  and 
withdrawals,  and  which  is  sent  to  each  customer 
with  the  canceled  checks  for  comparison.  The  pass 
book  continues  to  serve  as  a  receipt  for  deposits. 

In  case  the  depositor  expects  to  leave  the  deposit 
undisturbed  for  a  long  period,  he  may  notify  the 
receiving  teller  that  he  does  not  want  to  open  an 
account  "subject  to  check,"  but  desires  to  make  a 
time  deposit.  The  bank  agrees  to  pay  interest  on 
such  deposits  and  issues  a  receipt  called  certificate 
of  deposit.  It  is  usually  understood  that  no  interest 
is  to  be  paid  unless  the  money  remains  undisturbed 
for  a  period  of  three  months.  Interest  is  sacrificed  on 
all  withdrawals  made  before  the  end  of  that  period. 

In  case  the  depositor  desires  to  use  the  deposit 
with  the  bank  to  pay  a  debt  in  another  city  and  he 


BUSINESS     ORGANIZATION  95 

fears  that  his  own  check  will  not  be  acceptable  there, 
he  may  ask  for  a  cashier's  check  for  ihe  amount,  or 
he  may  write  a  check  himself  and  have  it  certified  by 
the  cashier.  In  both  cases  the  amount  of  the  check 
is  charged  to  his  account  as  a  withdrawal  and  the 
check  becomes  a  direct  obligation  of  the  bank. 

The  Receiving  Teller.  The  receiving  teller  sends 
the  deposit  slips  to  the  individual  bookkeeper  at  the 
end  of  the  day,  or  in  blocks  or  batches  at  stated  inter- 
vals during  the  day,  but  first  he  makes  a  record  of 
these  slips  to  enable  him  to  make  out  at  the  end  of  the 
day  a  receiving  teller's  proof.  This  is  a  sheet  upon 
which  are  listed  the  different  kinds  of  items  received ; 
cash,  notes,  checks,  etc.  Their  aggregate  amount 
must  of  course  be  the  same  as  the  total  of  all  the 
slips.  If  any  of  the  items  have  been  sent  on  to  other 
departments  of  the  bank,  the  total  amounts  received 
by  these  departments  plus  what  is  left  in  the  teller's 
cage  must  equal  the  amount  of  the  deposit  slips. 

The  Individual  Bookkeeper.  The  individual  book- 
keeper receives  the  deposit  slips  and  uses  them  to 
make  entries  on  the  individual  accounts.  These  are 
accounts  with  depositors  or  individuals,  hence  the 
term  individual  bookkeeper.  He  also  receives  all 
checks  drawn  by  customers  of  the  bank;  these  are 
called  own  checks.  In  all  cases,  therefore,  a  payment 
made  by  check  between  two  depositors  in  the  same 
bank  results  merely  in  two  bookkeeping  entries  in 
the  individual  bookkeeper's  department.    One  entry 


96  BUSINESS     ORGANIZATION 

to  decrease  the  balance  on  the  account  of  the  cus- 
tomer by  whom  the  check  was  drawn,  the  other  to 
increase  the  deposits  of  the  customer  in  whose  favor 
the  check  was  made  out.  In  large  banks  there  are 
many  such  individual  bookkeepers,  and  to  facilitate 
their  work  the  individual  ledgers  are  made  of  loose 
leaves  and  split  into  a  number  of  ledgers  of  con- 
venient size. 

The  Paying  Teller,  The  paying  teller  pays  checks 
drawn  by  customers  of  the  bank  against  their 
accounts.  He  also  cashes  many  other  items,  such  as 
bond  coupons,  as  an  accommodation  to  customers. 
His  is  a  very  difficult  position,  for  once  a  payment  is 
made,  mistakes  are  not  easily  corrected.  It  is 
different  with  a  receiving  teller  who  may  correct  a 
mistake  discovered  after  the  depositor  leaves  the 
bank.  It  is  therefore  considered  a  promotion  for  a 
receiving  teller  to  be  made  paying  teller. 

The  paying  teller  starts  the  day  with  a  certain 
amount  of  cash  in  his  cage.  As  he  makes  his  pay- 
ments throughout  the  day  and  his  cash  dwindles  he 
replenishes  it  from  the  vault  or  from  the  cash  which 
the  receiving  teller  sends  him.  At  the  end  of  the 
day  the  paying  teller  makes  out  the  paying  teller^ s 
proof.  In  his  case  all  canceled  checks  and  other 
items  upon  which  he  has  made  payment  must  show 
a  total  equal  to  the  amount  of  cash  which  has 
disappeared  from  the  cage. 


BUSINESS     ORGANIZATION  97 

The  canceled  items  are  sent  to  the  individual  book- 
keeper in  so  far  as  they  represent  payments  made  on 
account  of  depositors  of  the  bank;  other  items  are 
sent  to  the  various  departments  where  they  belong. 
If  they  are  checks  drawn  on  banks  of  the  same  town 
and  members  of  the  clearing  house,  they  are  sent  to 
the  clearing  house  desk;  if  drawn  on  other  banks  of 
the  same  town  the  items  go  to  the  collection  depart- 
ment; if  drawn  on  out-of-town  banks  the  mail  desk 
or  mail  teller  takes  care  of  them.  The  paying  teller 
must  constantly  be  on  the  alert  that  payment  is  not 
made  for  the  wrong  amount  or  to  the  wrong  person. 
His  work  is  complicated  by  the  fact  that  he  has  to 
watch  for  checks  upon  which  he  has  received  a  stop 
payment  order  from  the  drawer.  As  soon  as  an  order 
not  to  pay  a  check  previously  issued  is  received, 
a  card  is  filled  out  giving  all  information  and  also  the 
reason  for  the  stop  payment,  such  as  "check  stolen," 
"check  lost,"  etc.  This  card  is  constantly  before 
the  eyes  of  the  paying  teller  near  the  cage  window. 

The  Note  Teller.  The  note  teller  is  in  charge  of  the 
notes.  He  aids  in  the  preparation  of  notes  and  super- 
vises the  collection  of  interest  and  principal.  In 
case  collateral  is  deposited  he  inspects  the  collateral, 
and  keeps  himself  informed  of  any  changes  which 
may  occur  in  its  market  value.  Notes  are  always 
discounted  for  less  than  the  market  value  of  the 
collateral.  The  difference  between  the  actual  value 
of  a  collateral  and  the  amount  of  the  loan  is  called  the 


98  BUSINESS     ORGANIZATION 


margin.  The  note  teller  must  not  allow  this  margin 
to  be  wiped  out  by  a  sharp  decline  in  the  market. 
Should  the  margin  be  in  danger  then  he  must  call  for 
additional  collateral. 

The  note  teller  keeps  a  note  register  which  is  a 
list  of  all  the  notes  held  by  the  bank.  He  also  keeps 
a  direct  liability  and  an  indirect  liability  register.  In 
a  direct  liability  register  the  loans  made  and  the 
notes  discounted  are  recorded  under  the  name  of  the 
customer  directly  liable.  This  enables  the  bank  to 
tell  at  a  glance  whether  it  is  safe  to  allow  the  custo- 
mer to  borrow  an  additional  amount.  The  indirect 
liability  register  shows  how  many  notes  each  custo- 
mer has  indorsed.  Such  indirect  or  contingent  lia- 
bility may  at  any  time  become  a  real  liability  should 
the  person  directly  liable  fail  to  live  up  to  his  financial 
obligations.  A  large  indirect  liability  may,  therefore, 
prevent  a  person  from  borrowing  any  more  himself. 

The  Clearing  House.  In  the  course  of  a  day's  busi- 
ness a  bank  receives  from  its  customers  a  number  of 
checks  drawn  on  other  banks.  The  items  on  out-of- 
town  banks  are  sent  out  by  the  mail  desk  or  out-of- 
town  department  to  one  of  the  bank's  correspondents 
for  collection.  Such  a  correspondent  is  a  bank  in 
another  town  with  which  the  bank  carries  on  a 
reciprocal  business. 

The  checks  drawn  upon  other  banks  in  the  same 
town  or  city  must  be  collected  by  the  bank  itself. 
The  likelihood  exists  that  the  other  banks  in  town 


BUSINESS     ORGANIZATION  99 

will  in  turn  have  received  from  their  customers  and 
from  out-of-town  correspondents,  checks  drawn  upon 
most  of  the  other  banks  in  that  city.  In  order  to 
save  each  bank  the  trouble  of  sending  out  runners 
to  collect  the  checks  and  to  carry  the  money  back 
with  them  to  their  banks,  a  clearing  house  is  estab- 
lished. This  is  a  large  room  where  representatives  of 
the  banks  gather,  each  at  his  own  desk,  and  where 
they  exchange  their  checks.  Only  the  differences  or 
balances  are  then  settled  in  money.  This  saves  much 
time  and  means  also  a  great  economy  in  the  use  of 
money.  To  give  an  example:  Suppose  bank  A  has 
checks  drawn  on  bank  B  for  $5,000,  while  bank  B 
has  checks  drawn  on  bank  A  for  $4,500.  If  each  bank 
sent  out  a  runner  to  collect  these  items  these  men 
would  pass  each  other  on  the  street,  one  carrying 
$5,000,  the  other  $4,500  of  cash,  a  total  of  $9,500.  If 
these  men  meet  at  the  clearing  house,  bank  B  pays 
bank  A  for  the  $5,000  worth  of  checks  with  its 
$4,500  worth  of  checks  and  still  owes  $500.  This  is 
a  simple  case. 

In  most  clearing  houses  there  are  a  large  number 
of  banks,  some  twenty  or  thirty.  Each  of  these 
banks  sends  clerks  to  collect  checks  on  other  banks 
and  to  pay  checks  presented,  but  no  actual  payments 
take  place.  The  whole  question  of  payments  is  re- 
duced to  a  bookkeeping  transaction,  a  question  of 
debit  and  credit.  Every  bank  brings  claims  in  the 
form  of  checks  and  receives  evidence  of  money 


lOO  BUSINESS     ORGANIZATION 

which  it  owes  to  the  other,  i.  e.,  to  all  banks  repre- 
sented in  the  clearing  house.  The  difference  be- 
tween these  two  claims  forms  a  balance  to  be  paid, 
or  a  balance  to  be  received.  This  is  a  balance  not 
with  any  one  bank  but  with  all  the  banks,  in  other 
words,  with  the  clearing  house.  The  balance  is, 
therefore,  paid  to,  or  received  from,  the  clearing 
house.  Millions  of  dollars  in  checks  brought  by 
banks  into  the  clearing  house  may  be  thus  settled 
by  a  payment  of  balances  amounting  to  very  small 
sums. 

Safety  Deposit  Department.  Many  banks  main- 
tain a  safety  deposit  vault  and  rent  boxes  to  those 
who  want  a  safe  place  to  keep  valuable  papers. 
Usually  these  boxes  are  kept  in  a  large  vault  which  is 
closed  at  night,  and  each  box  is  locked  with  two  in- 
dependent and  different  locks.  The  key  to  one  lock 
is  given  to  the  renter,  the  key  to  the  other  lock  is 
held  by  an  official  of  the  bank  who  must  identify  the 
customer  before  admitting  him  to  the  vault. 

Other  Departments  of  a  Commercial  Bank.  The  de- 
partments and  officials  discussed  are  the  ones  with 
whom  a  business  man  most  frequently  comes  in 
touch.  Importers  and  exporters  deal  with  the  foreign 
exchange  department,  which  handles  all  drafts  and 
other  financial  documents  drawn  by  or  upon  foreign 
banks  or  firms.  In  the  larger  banks  a  foreign  trade 
department  is  maintained  which  advises  customers 
who  are  buying  or  selling  in  foreign  markets,  keeps 


BUSINESS     ORGANIZATION  lOI 

them  informed  of  market  conditions,  and  often 
brings  them  in  touch  with  reliable  firms  who  can  act 
as  their  foreign  representatives.  The  larger  banks  in 
New  York,  such  as  the  National  City  Bank,  the  Irv- 
ing National  Bank,  and  the  Guaranty  Trust  Com- 
pany, publish  pamphlets  and  weekly  or  daily  lists 
containing  financial  or  trade  information,  and  dis- 
tribute them  free  among  their  customers. 

In  all  banks  are  found,  moreover,  a  collection  de- 
partment which  collects  all  local  items,  and  an 
accounting  department  of  which  the  individual  book- 
keepers are  a  part. 

Loan  and  Trust  Companies.  Among  non-com- 
mercial banking  institutions  the  trust  companies  are 
of  most  vital  interest  to  business  men.  As  a  rule 
such  companies  do  not  handle  short-term  transac- 
tions though  some  of  them  combine  a  commercial 
banking  business  with  their  loan  and  trust  business, 
and  many  of  them  maintain  a  separate  banking 
department.  The  trust  companies,  because  they  do 
not  deal  in  demand  obligations,  can  safely  invest  in 
real  estate  and  loans  on  inactive  securities  for  long 
periods.  They  perform,  as  the  name  indicates,  prin- 
cipally trust  junctions.  They  act  as  mortgagees  in 
trust  for  bondholders;  they  administer  estates;  col- 
lateral, mortgage,  and  equipment  trusts;  and  act  as 
fiscal  agents  for  corporations.  A  fiscal  agent  is  a 
duly  appointed  agent  who  receives  and  pays  out 
funds.    In  this  capacity  they  pay  the  bond  principal 


102  BUSINESS     ORGANIZATION 

at  maturity  or  pay  the  interest  when  due.  The  work 
of  transfer  agents  and  registrars  is  usually  intrusted 
to  a  trust  company.  They  also  administer  under- 
writing syndicates,  and  in  case  of  reorganization  or 
dissolution  they  act  as  receivers,  looking  after  the 
interests  of  the  bondholders. 

Many  of  these  functions  could  be  performed  and 
are  not  infrequently  performed  by  individuals,  but 
there  are  advantages  attached  to  intrusting  these 
duties  to  a  trust  company.  The  principal  advan- 
tages are  that  trust  companies  are  permanent,  they 
are  experienced,  they  have  regular  business  hours, 
their  transactions  are  confidential,  and  they  are  in 
close  touch  with  the  financial  world,  and,  therefore, 
better  informed  than  most  individuals.  In  former 
days  trust  companies  carried  on  an  insurance  busi- 
ness along  with  their  other  activities,  but  this  is  no 
longer  customary.  Trust  compcinies  all  operate  un- 
der state  laws  and  legal  requirements  differ  widely  in 
the  various  states. 

Savings  Banks.  In  the  ordinary  course  of  business 
a  business  man  will  have  little  occasion  to  deal  with 
savings  banks.  These  are  a  class  of  non-commercial 
banks  which  are  primarily  organized  to  afford  a  safe 
and  moderately  profitable  means  of  investing  small 
savings.  These  banks  appeal  to  the  working  classes 
and  to  persons  of  moderate  incomes  who  accumulate 
slowly  by  small  weekly  or  monthly  installments. 
Safety,  and  a  fairly  good  return,  are  the  ideals  for 


BUSINESS     ORGANIZATION  IO3 

which  the  management  of  such  banks  strive.  In 
order  to  attain  these  ideals  they  invest  only  in  safe 
and  tried  securities,  based  upon  real  estate  or  issued 
by  municipal,  state,  or  federal  governments,  or  by 
industrial  concerns  of  proven  stability.  Conse- 
quently, such  banks  cannot  be  expected  to  pay  their 
depositors  upon  demand.  Investments  such  as  they 
make  are  safe,  but  cannot  be  quickly  turned  into  cash 
in  large  quantities.  Savings  banks,  therefore,  do  not 
favor  demand  withdrawals.  They  either  require 
notice  a  certain  number  of  days  before  withdrawal 
will  be  permitted,  or  they  limit  the  amount  which 
may  be  withdrawn  at  one  time. 

The  fact  that  interest  is  only  paid  on  deposits 
which  remain  with  the  bank  for  a  certain  minimum 
period,  usually  three  months,  acts  as  an  inducement 
to  allow  the  deposits  to  remain  undisturbed.  The 
surplus  money  which  must  be  kept  available  for 
withdrawals  from  day  to  day  is  usually  deposited 
with  commercial  banks  who  pay  the  savings  banks  a 
small  amount  of  interest  on  such  deposits. 

Savings  bank  accounts,  since  they  are  not  subject 
to  demand,  are  not  active.  This  means  that  the  em- 
ployees of  the  bank  must  use  double  care  not  to  make 
payments  to  anyone  not  entitled  to  receive  it. 
Tellers  quickly  learn  to  recognize  the  signatures  of 
active  depositors,  but  no  one  can  remember  a  cus- 
tomer or  his  signature  if  the  depositor  presents  him- 
self at  the  bank  only  a  few  times  a  year.    Such  banks, 


104  BUSINESS     ORGANIZATION 

therefore,  refuse  payment  except  upon  presentation 
of  the  pass  book. 

Savings  banks  in  the  eastern  states  are  frequently 
charitable  institutions  operated  with  no  thought  of 
profit.  All  earnings  are  then  divided  among  the  de- 
positors or  members.  In  the  middle  western  and 
western  states,  savings  banks  are  organized  as  cor- 
porations like  commercial  banks.  They  promise  a 
regular  rate  of  interest  and  the  net  earnings  are  paid 
out  as  dividends  to  the  stockholders.  As  buyers  of 
fiscal  bonds  and  mortgages,  savings  banks  form  an 
important  channel  through  which  the  small  savings 
of  the  masses  find  productive  employment. 

Insurance  Companies.  Insurance  companies  serve 
the  business  world  in  two  ways.  First,  they  aid  in 
solving  the  problem  of  risks  which  every  business 
faces,  and  second,  they  absorb  large  quantities  of 
securities,  and  thus  supply  to  commerce  and  industry 
the  working  and  capital  funds  needed.  This  needs 
further  explanation.  Life  is  full  of  uncertainty.  No 
one  knows  when  death  will  call  him,  or  when  some 
disease  or  accident  will  render  him  temporarily  and 
permanently  unable  to  work.  Fire  may  destroy 
without  waxning  the  savings  of  a  lifetime,  and  even 
in  a  bank's  fireproof  vaults,  thieves  may  break  in  and 
make  away  with  the  valuable  contents.  It  is  inter- 
esting that  these  uncertainties  may  be  reduced  to 
certainty.  The  number  of  houses  that  bum  each 
year  in  any  one  city  or  in  the  entire  United  Statf^ 


BUSINESS     ORGANIZATION  IO5 

varies  but  little.  Every  year  about  the  same  number 
of  people  pass  away,  except,  of  course,  in  time  of  war 
or  epidemic.  The  number  of  automobile  accidents 
is  a  fairly  constant  figure  and  so  is  the  number  of 
thefts.  This  means  that  it  is  possible  to  predict,  not 
which  particular  house  will  bum  next  year,  but  with 
a  fair  degree  of  certainty  how  many  houses  are  likely 
to  be  destroyed  in  New  York  during  that  same  period, 
and  with  even  greater  certainty  how  many  will  be 
burned  in  the  United  States  as  a  whole. 

The  larger  the  territory  covered  the  less  local  con- 
ditions will  influence  our  figures.  One  incendiary 
may  cause  the  fire  loss  in  a  country  town  to  rise  far 
above  normal,  but  his  work  will  have  little  effect 
upon  the  figures  of  the  country  as  a  whole.  The 
same  reasoning  holds  true  of  the  death,  sickness,  ac- 
cident, and  theft  statistics. 

Reducing  Uncertainty  to  Certainty.  If  in  a  town  of 
a  hundred  thousand  houses,  one  hundred  houses  bum 
every  year,  the  house  owners  may  agree  to  establish 
a  fund  by  regular  contributions  from  which  all  fire 
losses  would  be  paid.  This  fund  would  not  need  to 
be  larger  than  to  rebuild  one  hundred  houses  a  year. 
Every  house-owner  would,  therefore,  be  called  upon 
to  pay  one  one-thousandth  of  the  value  of  a  house 
each  year.  But  in  return  he  would  have  the  promise 
that  should  his  house  bum  it  would  be  rebuilt  from 
the  general  fund.  This  is  the  principle  upon  which 
all  insurance  is  based. 


I06  BUSINESS     ORGANIZATION 

By  forming  a  sufficiently  large  club  of  people  all 
facing  the  same  risks,  and  by  studying  carefully  the 
experience  in  the  past  of  such  risks — the  longer  the 
period  the  better — it  is  possible  in  almost  every  case 
to  arrive  at  a  figure  which  will  indicate  what  may 
reasonably  be  expected  in  the  future.  Some  fluctu- 
ation will  occur,  but  if  studied  over  a  long  enough 
period,  even  this  fluctuation  will  be  discovered  to 
take  place  with  regularity. 

If  each  business  man  had  to  face  his  own  risks, 
commerce  would  be  much  hampered,  if  not  impos- 
sible. Who,  indeed,  would  dare  stock  his  warehouse 
full  of  expensive  goods,  investing  not  only  all  that  he 
possessed  but  funds  borrowed  from  others  as  well, 
when  a  carelessly  dropped  match  of  some  minor  em- 
ployee might  start  a  fire.  Such  a  fire  would  bring 
ruin  to  the  owner  and  would  destroy  the  means  of 
paying  those  from  whom  he  borrowed.  Insurance 
makes  it  possible  for  him  to  protect  himself  against 
this  uncertainty.  A  comparatively  small  yearly  pay- 
ment in  the  common  fund  buys  him  certainty.  He 
may  now  expand  his  business,  tie  up  all  his  funds, 
and  borrow  from  others.  The  risk  of  fire  is  no  great 
cause  of  worry  to  him. 

Insurance  as  a  Business,  Sometimes  such  funds 
are  administered  co-operatively.  Such  insurance  or- 
ganizations are  called  mutuals.  Most  of  the  insurance 
is  in  the  hands  of  companies  which  make  a  business 
of  writing  insurance  and  the  stockholders  of  which 


BUSINESS     ORGANIZATION  IO7 

reap  the  benefit  of  the  difference  between  losses  paid 
and  earnings.  These  earnings  are  derived  from  pre- 
miums or  the  periodic  payments  of  the  people  in- 
sured, and  also  from  the  income  of  the  investments 
made.  Every  insurance  company  must  set  aside  a 
reserve,  and  is  frequently  compelled  by  law  to  do 
so.  From  this  reserve,  unexpected  fluctuations  •  in 
losses  are  met.  The  funds  of  this  reserve  are  in- 
vested in  bonds  and  stocks  and  yield  a  substantial 
income. 

Different  Types  of  Insurance,  Many  risks  have  in 
this  way  been  reduced  to  regular  payments.  It  is 
possible  to  insure  against  sickness,  accidents,  un- 
employment, and  death.  Caruso  was  insured  against 
loss  of  his  voice,  while  Paderewski  insures  his  fingers. 
The  business  man  finds  it  possible  to  insure  against 
fire,  against  loss  of  goods  at  sea,  against  losses  result- 
ing from  dishonesty  of  employees,  or  from  faulty 
titles  to  real  estate.  He  may  protect  himself  in  the 
same  way  against  storms,  hail,  and  frost.  He  may 
insure  his  goods,  his  building,  his  furniture,  or  his 
plate  glass  windows. 

Fire  Insurance,  Besides  considering  the  actual 
normal  risk  from  fire,  a  fire  insurance  company  must 
also  consider  the  moral  risk.  It  is  not  difficult  to  see 
that  after  a  piece  of  property  has  been  insured,  the 
owner  is  likely  to  be  a  little  more  careless  with  it.  He 
says  to  himself,  "It  is  insured,  anyhow,  so  I  don't 
care."    He  may  even  go  so  f £u*  as  to  destroy  it  inten- 


I08  BUSINESS     ORGANIZATION 

tionally  in  order  to  collect  the  insurance.  This  is  a 
problem  to  be  reckoned  with  in  all  insurance,  but 
most  of  all  in  property  insurance ;  for  it  is  not  likely 
that  Paderewski  would  deliberately  put  his  hand 
against  a  band  saw  or  that  a  man  would  commit 
suicide  to  collect  the  insurance.  In  fire  insurance,  the 
moral  risk  is  a  real  risk.  The  policy,  which  is  the 
contract  between  the  insurance  company  and  the 
insured,  always  is  careful  in  stating  that  the  amount 
which  will  be  paid  by  the  company  will  not  exceed 
the  cash  value  of  the  property  destroyed.  The  actual 
loss  must  be  determined  after  the  fire  occurred.  This 
clause  is  intended  to  limit  the  moral  risk,  for  if  pay- 
ment were  made  for  the  face  value  of  the  policy  re- 
gardless of  the  value  of  the  property  at  the  time  of 
the  fire,  having  fires  might  become  a  profitable  line 
of  business.  Many  states,  however,  have  passed 
valued  policy  laws  under  which  the  insurance  com- 
pany is  compelled  to  pay  the  face  value  of  the  policy 
in  case  of  total  loss,  even  though  the  actual  loss  is  far 
less  than  that. 

In  order  to  bring  uniformity  in  the  insurance  busi- 
ness many  companies  have  by  mutual  agreement 
adopted  a  standard  policy.  This  policy  is  a  formid- 
able document.  The  principal  features  are  the  fol- 
lowing: In  the  first  place,  the  policy  insures  only 
against  "direct  loss  or  damage  by  fire,"  but  this  must 
be  interpreted  to  mean  fire  which  has  escaped  from 
its  proper  receptacle.    No  damages  can  be  collected 


BUSINESS     ORGANIZATION  IO9 

on  a  coat  scorched  by  being  hung  near  a  red-hot 
stove.  Loss  resuhing  from  Hghtning  is,  therefore,  not 
covered  unless  special  mention  is  made  of  it ;  neither 
does  the  contract  offer  protection  against  theft  in  the 
process  of  removing  goods  from  a  burning  building. 
If  goods  insured  are  spoken  of  in  a  contract  as  in  one 
building,  they  are  no  longer  protected  if  removed 
from  this  building. 

When  a  fire  has  occurred  the  insured  must  give 
immediate  notice  in  writing  and  he  must  send  in  a 
statement  of  the  amount  of  his  loss,  accompanied  by 
a  statement  of  a  notary  public  that  he  regards  the 
claim  to  be  honest.  Usually  there  is  a  clause  in  the 
policy  which  provides  for  the  appointing  of  ap- 
praisers who  are  to  pass  upon  the  justice  of  the 
claim. 

The  rate  which  must  be  paid  for  fire  protection  is 
determined  to  a  large  degree  by  the  kind  of  risk 
offered  for  insurance.  A  wooden  building  standing 
near  a  wooden  garage  is  more  in  danger  of  being 
totally  destroyed  than  a  concrete  fireproof  structure 
in  the  middle  of  a  field.  The  wooden  building  would, 
therefore,  have  to  pay  a  higher  price  for  the  insur- 
ance protection.  The  following  factors  influence 
the  cost  of  insurance : 

1.  The  type  of  building;   whether  wood,  stone,  or  con- 

crete. 

2.  The  use  to  which  it  is  put.    An  ice  storage  plant  runs 

less  danger  of  fire  than  a  garage. 


no BUSINESS     ORGANIZATI  O  N 

3.  The  fire  prevention  measures  taken.    A  store  with  a 

sprinkler  system,  that  is,  a  system  of  water  pipes 
which  automatically  spray  water  into  the  store 
when  heated  to  a  certain  temperature,  pays  a  low 
rate. 

4.  The  surrounding  buildings.     A  good  building  may 

have  to  pay  a  high  premium  or  annual  payment 
because  surrounded  by  poor  risks. 

5.  The  condition  of  the  street  and  of  the  fire  fighting 

equipment  of  the  town.  A  wide,  well-paved  street 
makes  it  possible  for  the  apparatus  to  reach  the 
building  quickly.  A  greater  loss  is  likely  to  result 
where  fire  has  to  be  fought  with  a  low  pressure 
municipal  water  supply  than  where  a  special  high 
pressure  system  has  been  installed  for  fire  fighting. 

Marine  Insurance,  When  goods  are  shipped  by 
water  it  becomes  necessary  to  insure  them  against 
losses  resulting  from  the  "perils  of  the  sea"  as  well  as 
from  fire.  These  risks  are  covered  by  marine  insur- 
ance. Much  of  the  marine  insurance  business  in  this 
country  is  handled  by  foreign  companies,  among 
which  English  companies  are  the  most  Important. 

The  English  marine  insurance  is  centered  in 
Lloyd's.  This  is  a  corporation  of  which  marine  in- 
surance companies  are  members  and  which  has  as  its 
purpose  to  protect  the  interests  of  its  members,  to 
collect  and  to  distribute  information  in  regard  to 
shipping,  and  to  conduct  an  insurance  business.  The 
agents  of  Lloyd's  are  found  in  every  important  ship- 


BUSINESS     ORGANIZATION  III 

ping  center.  They  are  charged  with  collecting  infor- 
mation regarding  ships,  inspecting  vessels,  reporting 
upon  losses,  and  with  aiding  in  collecting  evidence. 

An  important  publication  published  by  an  affil- 
iated organization,  is  Lloyd's  Register  of  British  and 
Foreign  Shipping,  which  is  a  catalogue  of  all  English 
ships  of  over  one  hundred  tons  and  of  a  large  number 
of  foreign  ships.  A  detailed  description  of  the  ship 
is  given,  and  the  vessel  is  rated  on  the  basis  of  a  regu- 
lar inspection.  This  rating  determines  the  rates 
charged  for  insurance. 

Lloyd's  Corporation  of  Underwriters  makes  it  pos- 
sible for  many  companies  to  underwrite  large  risks 
together.  This  is  called  underwriting,  because  each 
company  signs  or  underwrites  the  policy.  The  total 
risk  is  thereby  divided  over  a  large  number  of  com- 
panies, sometimes  as  many  as  fifty.  This  means  a 
wide  distribution  of  risk  for  each  company,  and  it 
lessens  the  effect  which  the  sinking  of  a  large,  expen- 
sive ship  would  have  on  the  finances  of  an  individual 
insurance  company. 

A  large  number  of  different  policies  are  issued, 
some  covering  the  ship,  and  others  the  cargo;  some 
protecting  against  damage  from  the  "perils  of  the 
sea,"  and  others  against  theft  or  lighterage  accidents. 

Usually  policies  issued  for  goods  carry  the  "F.  P. 
A."  clause  (free  from  particular  average).  Average 
means  damage.  This  clause  indicates  that  the  insur- 
ance company  does  not  undertake  to  protect  the 


112 BUSINESS     ORGANIZATION 

shipper  against  partial  losses  or  damage.  The  policy 
covers,  in  such  cases,  only  a  total  loss  resulting  from 
the  destruction  of  the  ship,  and  also  general  average. 
Any  charges  made  against  ship  and  cargo  to  cover 
damages  incurred  by  a  particular  shipment  in 
order  to  save  the  ship,  such  as  throwing  it  overboard 
to  lighten  the  vessel,  are  called  general  average  and  are, 
therefore,  covered  by  the  policy.  It  is  possible  to 
insure  goods  'W.  P.  A.''  (with  particulcir  average),  if 
the  shipper  desires  it. 

Credit  Insurance.  Every  business  man  who  sells 
goods  on  credit  faces  the  risk  of  not  being  able  to 
collect.  Under  normal  conditions  and  when  due  care 
is  used  in  extending  credit,  these  losses  run  fairly 
even.  This  normal  loss  is  different  in  every  kind  of 
business ;  in  some  it  is  one  per  cent  of  sales ;  in  others 
as  high  as  four  per  cent.  As  long  as  these  credit 
losses  remain  normal  the  business  man  is  nottro*ubled. ' 
He  will  merely  charge  that  much  more  for  his  goods, 
counting  his  credit  loss  as  part  of  his  cost  of  doing 
business.  What  does  cause  him  worry  is  the  possi- 
bility of  an  unexpected  and  unusual  loss.  Against 
this  unexpected  loss  he  can  insure  himself  with  a 
credit  insurance  company.  The  normal  or  initial 
loss  he  must  bear  himself. 

A  credit  insurance  company  will  not  insure  against 
all  abnormal  losses,  but  limits  its  payments  to  a  cer- 
tain percentage  of  the  capital  rating  which  the  firm 
has  received  in  Dun's  or  Bradstreet's  credit  reports. 


BUSINESS     ORGANIZATION  II3 

If  a  customer  is  rated  at  $50,000,  then  the  credit  in- 
surance will  cover  a  loss  not  exceeding,  say  25  per 
cent  of  this,  or  $12,500.  In  addition  to  this,  the 
insurance  company  will  limit  the  amount  which  will 
be  paid  on  any  one  account.  This  is  known  as  the 
single  account  limit.  Suppose  that  the  single  account 
limit  in  the  case  given  was  $10,000,  then  the  payment 
upon  this  account,  notwithstanding  the  high  capital 
rating,  could  never  exceed  $10,000.  The  merchant 
would  have  to  face  the  remaining  loss. 

In  most  cases  only  accounts  with  firms  which  are 
classified  in  the  first  two  classes  of  credit  by  Dun  and 
Bradstreet  can  be  insured.  In  Dun's  classification 
only  high  and  good  credit  risks  are  insurable. 

In  addition  to  all  these  limitations  the  insurance 
company  will  limit  its  total  liability  to  a  fixed  sum. 
No  matter  what  the  losses  are,  the  company  can 
never  be  called  upon  to  pay  more  than  that  sum 
upon  the  policy  issued.  Credit  insurance  is  still 
comparatively  new,  but  manufacturers  and  whole- 
salers are  increasingly  making  use  of  the  protection 
it  offers. 

Fidelity  Insurance,  When  an  employer  hires  a  new 
employee,  places  him  in  a  responsible  position,  allows 
him  to  handle  large  sums  of  money  or  to  collect  bills 
from  customers,  he  is  taking  a  risk.  The  employer 
will,  therefore,  require  that  the  employee  offer  some 
security  by  which  he  may  be  reimbursed  in  case  of  a 
k>ss.    The  employee  may  ask  some  of  his  friends  to 


114  BUSINESS     ORGANIZATION 

"go  bond"  for  him,  that  is,  to  promise  his  employer 
that  they  will  make  good  any  loss  resulting  from  dis- 
honesty. But  not  everyone  has  rich  friends  who  are 
willing  to  do  this,  nor  is  everyone  willing  to  bother 
his  friends  with  such  requests. 

The  fidelity  insurance  company  takes  the  place  of 
these  friends  and  in  return  for  a  fee,  paid  by  the  em- 
ployee or  the  employer,  undertakes  to  protect  the 
employer,  after  a  careful  investigation  has  been  made 
of  the  trustworthiness  of  the  new  employee.  The 
employer  is  protected  more  securely  than  when 
friends  undertake  to  protect  him,  for  the  company  is 
more  likely  to  live  up  to  its  obligations.  The  pre- 
mium is  determined  by  the  statistics  of  risk,  and  also 
by  the  actual  amount  of  money  which  it  will  be 
possible  for  the  employee  to  misappropriate.  In 
order  to  limit  this  amount  the  insurance  company 
will  frequently  require  certain  internal  checks.  This 
usually  means  that  the  making  of  payments  and  the 
authorization  for  payment  are  placed  in  the  hands 
of  different  employees.  Frequently  such  companies 
require  checks  to  be  s'igned  by  two  officials,  while  pay- 
ments in  cash  must  be  reported  at  the  end  of  each 
day  to  some  other  official  or  employee.  Companies 
undertaking  this  kind  of  insurance  are  called  fidelity, 
guaran.ty,  and  bonding  companies. 

The  Stock  Exchange.  The  stock  exchange. provides 
a  market  or  meeting  place  for  buyers  and  sellers  of 
stocks  or  bonds.    Such  exchanges  are  found  in  many 


BUSINESS     ORGANIZATION  II5 

large  cities.  In  New  York  three  such  markets  exist, 
the  New  York  Stock  Exchange,  the  Consohdated 
Stock  Exchange,  and  the  Curb.  Each  of  these  stock 
markets  is  an  association  of  men  who  make  a  profes- 
sion of  buying  and  selling  securities.  Trading  on 
these  exchanges  is  limited  to  its  members.  There  is 
a  good  reason  for  this.  The  exchange  is  established 
not  only  in  order  to  provide  a  place  where  trading 
may  be  done,  but  also  to  regulate  this  trading.  The 
rules  of  the  exchange  are  very  strict  and  any  one  vio- 
lating them  faces  the  danger  of  losing  his  seat. 

The  New  York  Stock  Exchange  is  stricter  in  its 
regulations  than  the  other  two  mentioned,  both  in 
the  supervision  of  trading  and  in  its  requirements 
imposed  upon  the  companies  which  are  anxious  to 
have  their  securities  admitted  to  the  exchange.  Its 
rules  for  membership  are  exceedingly  strict  and  the 
number  of  members  is  limited. 

The  stocks  and  bonds  which  satisfy  the  require- 
ments of  the  New  York  Stock  Exchange  are  listed 
and  are  spoken  of  as  listed  stocks  or  listed  bonds.  In 
order  to  have  its  securities  listed,  a  company  must 
submit  detailed  information  regarding  assets,  lia- 
bilities, the  number  of  shares  authorized,  a  list  of  the 
officers  and  directors,  and  the  addresses  and  names  of 
the  transfer  agent  and  the  registrar.  Moreover,  the 
Exchange  requires  that  annual  reports  containing 
balance  sheet,  profit  and  loss  statement,  and  operat- 
ing statistics  be  sent  to  the  stockholders.    The  New 


Il6  BUSINESS     ORGANIZATION 

York  Stock  Exchange  also  allow§  dealings  in  se- 
curities which  are  unlisted,  but  t*hese,  too,  must 
satisfy  certain  requirements  before  being  admitted 
to  this  privilege.  Banks  will  lend  more  readily  upon 
listed  than  upon  the  unlisted  securities  when  pre- 
sented as  collateral. 

Stocks  and  bonds  not  admitted  to  the  New  York 
Stock  Exchange  are  bought  and  sold  on  the  Consoli- 
dated Stock  Exchange  and  on  the  Curb.  The  latter 
is  an  exchange  held  in  the  open  air  a  short  distance 
from  the  New  York  Stock  Exchange  building. 

The  Brokers,  A  broker  is  a  person  who  buys  or 
sells  goods  for  others.  The  pay  received  for  this 
service  is  called  commission.  A  broker  dealing  in 
stocks  and  bonds  is  called  a  stock  broker  or  bond 
broker.  Not  all  brokers  are  members  of  an  exchange ; 
they  may  deal  through  others  who  are  members.  In 
the  New  York  Stock  Exchange  the  membership  is 
limited  to  i,ioo,  and  seats  are  sold  at  high  prices  by 
members  who  wish  to  retire.  The  prices  paid  vary, 
but  as  much  as  $80,000  has  been  paid.  The  buyer 
must  have  the  approval  of  the  membership  com- 
mittee. The  members  all  charge  the  same  rate  of 
commission,  which  in  the  case  of  transactions  for 
outsiders  is  no  less  than  one-eighth  of  one  per  cent 
on  the  par  value  of  securities. 

How  Stocks  and  Bonds  Are  Sold,  The  brokers  and 
the  stock  exchanges  perform  very  important  services 
to  the  business  world.    Without  this  financial  ma- 


BUSINESS     ORGANIZATION  II7 

chinery,  corporations  would  have  great  difficulty  iiir 
finding  a  market  for  their  securities.  Through  the 
exchanges  investors  are  enabled  to  buy  large  varieties 
of  securities,  and  they  are  constantly  on  the  alert  for 
those  which  promise  not  only  a  fair  return,  but  also> 
a  possible  rise  in  price. 

Right  here  a  word  may  be  said  about  investment, 
and  speculation.  If  one  buys  securities  with  the  in- 
tention of  keeping  them,  and  largely  because  they 
promise  a  good  return  on  the  purchase  price,  then 
this  may  be  called  making  an  investment.  It  is  differ- 
ent when  one  buys  securities  with  the  intention  of 
selling  them  soon  and  to  make  profit  on  the  change 
in  price.  This  is  speculation.  The  line  is  difficult  ta 
draw — it  is  largely  a  matter  of  intention. 

Securities  bought  for  investment  are  almost  always.  ^ 
paid  for  in  cash.  The  reason  they  are  wanted  is  be- 
cause someone  has  a  cash  surplus.  Stocks  bought  for 
speculation  are  almost  always  purchased  with  funds- 
obtained  by  borrowing  from  the  banks.  Suppose  a 
speculator  desires  to  purchase  $10,000  worth  of 
stocks.  He  may  go  to  a  bank  and  borrow  enough  to- 
make  this  possible.  Usually  a  broker  will  do  this 
for  him. 

The  bank  is  willing  to  lend  the  necessary  funds  on 
condition  that  the  securities  be  placed  in  its  vault  as 
collateral.  Naturally  a  bank  will  not  lend  up  to  the 
market  value  of  the  stocks  or  bonds  but  will  require 
a  margin.    This  may  be  10  per  cent  of  the  market. 


Il8  BUSINESS     ORGANIZATION 

price  or  more,  as  the  case  may  be,  depending  upon 
the  class  of  security  offered,  and  upon  the  market 
price.  The  speculator  will  have  to  supply  the  re- 
mainder. By  this  method  a  man  with  $i,ooo  may 
speculate  upon  the  possible  rise  in  value  of  $10,000 
worth  of  stock.  The  bank  cannot  lose  as  long  as  the 
market  price  of  the  stock  does  not  fall  below  the 
amount  of  the  loan. 

The  buyer  must  pay  the  bank  interest  on  the  loan 
and  must  pay  a  commission  to  the  broker.  Should 
the  market  price  fall,  the  bank  will  call  upon  him 
to  increase  his  collateral  or  to  supply  more  margin.  If 
he  is  unable  to  furnish  either,  then  the  bank  will  sell 
out  and  he  must  face  his  loss.  The  fear  of  losing  the 
investment  often  drives  such  speculators  to  mis- 
appropriate funds  to  satisfy  the  demands  for  more 
margin.  They  always  hope  that  a  sudden  change  in 
the  market  will  enable  them  to  sell  with  a  profit  and 
to  cover  up  their  dishonesty. 

The  market  for  stocks  and  bonds  is  extremely  sen- 
sitive to  all  financial,  economic,  and  political  changes. 
Every  national  and  international  event  has  its  effect. 
Those  dealing  in  securities  must,  therefore,  keep  a 
close  watch  upon  prices,  and  study  world  conditions 
constantly. 

The  optimism  in  some  quarters  is  reflected  in  the 
bulls,  that  is,  those  who  buy  with  the  expectation 
that  prices  will  go  up ;  while  pessimism  in  the  future 
of  prices  leads  to  hear  dealings.    The  bear  sells  stock 


BUSINESS     ORGANIZATION  II9 

for  future  delivery,  say  a  week  later,  and  hopes  that 
the  price  will  have  declined  sufficiently  to  allow  him 
to  buy  at  a  lower  price  than  the  one  for  which  he  has 
contracted  to  deliver.  This  is  short  selling,  while  a 
bull  is  long  of  the  market.  These  two  opposing  camps 
are  constantly  contending  and  keep  the  market 
active. 

The  stock  exchange  performs,  therefore,  several 
important  functions  in  the  business  world.  It  pro- 
vides a  regular  and  regulated  market  for  securities,  as 
well  as  strict  supervision  over  its  members.  Regular 
dealings  make  it  possible  for  investors  to  invest  their 
money  with  the  knowledge  that  they  can  turn  their 
investment  into  cash  at  any  time  in  the  future.  The 
exchange  also  makes  it  possible  for  the  banks  to  find 
a  profitable  market  for  some  of  their  funds  which 
otherwise  would  lie  idle,  by  lending  on  collateral. 
Without  stock  exchanges  corporations  could  not 
easily  find  a  market  for  their  securities,  and  industry 
would  depend  for  its  expansion  largely  upon  local 
funds. 

Summary,  Many  institutions  offer  aid  to  the 
business  man  in  the  solving  of  his  financial  problems. 
The  banks,  loan  and  trust  companies,  insurance  com- 
panies, and  the  stock  exchanges  are  the  most  impor- 
tant financial  institutions.  The  commercial  banks 
aid  in  supplying  the  current  needs  of  business, 
the  non-commercial  institutions  are  largely  active  in 
ofifering  opportunities  for  the  expansion  of  permanent 


120  BUSINESS     ORGANIZATION 

capital  funds.  Insurance  is  a  great  aid  in  the  financ- 
ing of  business.  By  means  of  it  uncertainty  is  re- 
duced to  certainty.  The  stock  exchanges  provide  a 
ready  market  for  the  sale  of  securities.  The  brokers 
are  the  officially  recognized  traders  on  these  ex- 
changes. 


REFERENCES 

Banks 

R.  S.  Harris.  Practical  Banking,  Houghton  Mifflin 
Company. 

A.  K.  Fiske.  The  Modern  Bank.  D.  Appleton  and  Com- 
pany. 

W.  H.  Kniffin.  The  Practical  Work  of  a  Bank,  The 
Bankers  Publishing  Company. 

H.  Parker  Willis.  American  Banking,  La  Salle  Exten- 
sion University. 

Trust  Companies 

F.  B.  Kirkbride  and  J.  E.  Sterrett.  The  Modern  Trust 
Company.    The  Macmillan  Company. 

Savings  Banks 

W.  H.  Kniffin.  The  Savings  Bank  and  Its  Practical 
Work,    The  Bankers  Publishing  Company. 

Insurance 

S.  S.  Huebner.  Property  Insurance.  D.  Appleton  and 
Company. 


BUSINESS    ORGANIZATION 121 

Stock  Exchanges 

Conway    and    Atwood.      Investment    and    Speculation. 

Alexander  Hamilton  Institute. 
S.  S.  Pratt.    The  Work  of  Wall  Street.    D.  Appletori  and 

Company. 
W.  H.  Lough.     Business  Finance.     The  Ronald  Press 

Company. 

QUESTIONS  FOR  FURTHER  STUDY 

Banks 

1.  What  departments  are  found  in  the  bank  with 
which  you  are  best  acquainted? 

Reference:    Interview  with  some  official  of  the  bank. 

2.  What  system  is  used  in  that  bank  to  keep  its 
depositors  informed  of  the  condition  of  their  accounts? 

Reference:    Interview  with  some  official  of  the  bank. 

3.  Is  "paying  and  receiving"  done  by  one  teller,  or  by 
two,  or  by  several?  Or  are  the  two  combined  in  several 
windows?  Can  you  discover  the  reason  for  the  arrange- 
ment that  exists? 

Reference:    (a)     Harris.    Chapters  V,  VI. 

(b)     Interview  with  paying  or  receiv- 
ing teller  of  the  bank. 

4.  What  type  of  savings  bank  exists  in  your  city? 
Reference:    (a)     Interview  with  official  of  the  bank^ 

(b)     The  banking  law  of  the  state. 

5.  What  does  the  law  in  your  state  say  in  regard  to  the 
carrying  on  of  a  banking  business  by  a  trust  company? 
Do  you  see  a  good  reason  for  the  regulation? 


122 BUSINESS    ORGANIZATION 

Reference:    (a)     The  banking  law  of  the  state. 

(b)     Kirkbride  and  Sterrett.    Chapters 
I,  II,  IV. 
Insurance 

1.  How  are  insurance  rates  determined? 

Reference:   Huebner.     Chapters  XVI,  XVII. 

2.  What  may  a  business  man  do  to  lower  his  insurance 
rates? 

Reference:   Huebner.    Chapter  XX. 

3.  What  causes  have  contributed  to  give  England 
prominence  in  marine  insurance? 

Reference:   Huebner.    Chapter  XXII. 

Stock  Exchanges 

1.  What  is  meant  by  call  loans? 

Reference:    Conway  and  Atwood.     Chapter  IV. 

2.  What  are  the  requirements  for  admission  of  stocks 
to  the  list? 

Reference:    Ibid,  Chapter  IV. 

3.  What  is  the  New  York  Stock  Exchange  clearing 
house? 

Reference:    Pratt.    Chapter  IX. 

4.  What  is  a  subscription  right,  and  how  is  its  value 
determined  ? 

Reference:   Lough.     Part  III,  Chapter  XIII. 

5.  Describe  how  a  brokerage  house  handles  an  issue  of 
stock. 

Reference:   Lough.     Part  III,  Chapter  XIV. 


BUSINESS     ORGANIZATION  I23 

TEST  QUESTIONS 

1.  Describe  how  a  deposit  is  made. 

2.  What  are  the  duties  of  the  individual  bookkeeper? 

3.  How  does  the  clearing  house  operate? 

4.  What  factors  determine  the  rate  to  be  paid  for 
fire  insurance? 

5.  What  is  meant  by  "average"? 

6.  What  kind  of  protection  is  offered  by  a  credit 
insurance  company? 

7.  What  is  a  stock  broker? 

8.  What  is  meant  by  short  selling? 

9.  Distinguish  between  speculation  and  investment. 


124  BUSINESS     ORGANIZATION 


CHAPTER   VII 

MANAGEMENT 

The  Problems  of  Management.  The  management  of 
a  concern  may  be  in  the  hands  of  the  owner,  or  in  the 
case  of  a  partnership,  in  the  hands  of  one  of  the  part- 
ners. In  corporate  enterprises  and  frequently  in  un- 
incorporated undertakings  a  manager  is  appointed  to 
supervise  and  direct  the  enterprise.  Such  a  manager 
usually  has  full  control  over  the  buying,  manufactur- 
ing, and  selling,  though  he  is  responsible  for  his  work 
to  the  owners.  In  some  corporations  an  executive 
committee  is  appointed  to  confer  frequently  with  the 
manager  and  no  important  decision  can  be  taken 
without  its  consent. 

The  manager  brings  together  the  raw  material,  the 
tools  and  machinery,  the  working  force,  and  directs 
the  processes  of  production.  His  aim  should  be  to 
combine  these  elements  in  the  most  effective  way  so 
that  he  may  obtain  the  greatest  net  result.  The  man- 
ager's position  is  a  very  difficult  one  and  one  which 
demands  wide  knowledge  and  deep  insight.  He  must 
know  a  good  deal  of  the  methods  of  production,  of 
tools  and  their  correct  use;  he  must  be  something  of 
an  engineer.  He  must  not  only  know  the  physical 
plant,  he  must  also  understand  the  financial  prob- 


BUSINESS      ORGANIZATION  125 

lems  that  affect  a  concern.  Not  only  large  output 
but  output  at  competitive  cost  should  be  his  aim. 
He  must,  therefore,  understand  the  buying  and  selling 
market;  he  must  be  something  of  a  business  man.  In 
order  to  be  able  to  interpret  the  records  of  the  con- 
cern, he  should  have  some  knowledge  of  accounting. 

Finally,  he  should  know  not  only  how  to  get  results 
in  respect  to  volume  and  cost  of  output,  he  should  be 
able  to  get  these  favorable  results  without  sacrificing 
the  human  element  in  the  business.  Success  in  out- 
put should  go  hand  in  hand  with  making  better, 
stronger,  happier  men  and  women  out  of  the  working 
force.  A  business  concern  which  attains  material 
success  at  the  expense  of  those  who  work  within  its 
walls  is  a  social  menace.  The  manager,  therefore, 
faces  no  small  problem. 

The  Manager  as  a  Jack  of  All  Trades,  As  long  as 
the  business  unit  is  small  and  the  workmen  few  in 
number,  and  as  long  as  these  workmen  are  largely 
skilled  experts  in  their  own  line  the  manager  will  be 
able  to  oversee  all  details  of  the  business  himself.  He 
relies  to  a  lau-ge  extent  upon  the  knowledge  and  skill 
of  his  workmen  for  the  efficient  execution  of  the  work. 
He  also  relies  upon  his  personal  contact  with  them 
to  settle  any  difficulty  or  friction.  He  usually  has 
climbed  up  from  the  ranks  and  is  sufficiently  ac- 
quainted with  the  processes  to  be  able  to  supervise 
them  and  even  to  instruct  the  workmen.  To  be  sure 
he  does  not  show  equal  efficiency  in  all  the  various 


126  BUSINESS     ORGANIZATION 

functions  he  is  called  upon  to  perform,  but  he  is  in  no 
worse  shape  than  his  competitors  who  are  facing  the 
same  important  and  unrelated  duties. 

This  type  of  one-man  organization  is  still  found 
quite  generally;  it  is  the  typical  organization  of  a 
small  concern.  The  owner  or  manager  attends  to 
everything  and  is  usually  very  jealous  of  his  powers 
of  control.  Feeling  that  no  one  can  perform  these 
various  functions  as  well  as  he,  he  is  afraid  of  del- 
egating authority  to  others. 

When  the  business  grows  large  it  becomes  humanly 
impossible  for  one  man  to  look  after  every  detail.  It 
is,  therefore,  necessary  to  appoint  assistants.  When 
it  is  decided  to  take  this  step  some  definite  plan  of 
dividing  the  duties  and  the  authority  of  those  ap- 
pointed must  be  outlined.  The  division  of  work 
which  first  suggests  itself  is  that  into  production, 
sales,  and  administration  or  office  departments.  In 
addition  to  a  general  manager,  three  submanagers 
who  are  directly  responsible  to  the  general  manager 
will  be  appointed.  The  various  clerks  and  working- 
men  in  these  departments  remain  the  same,  the  only 
difference  is  that  they  are  from  now  on  responsible 
to  the  production  manager  (or  factory  superinten-' 
dent),  the  sales  manager,  or  the  office  manager,  as  the 
case  may  be,  and  not  directly  to  the  general  manager. 

There  are  certain  fundamental  principles  which 
must  be  observed  in  this  and  every  type  of  business 
organization,  for  these  principles  are  basic: 


BUSINESS     ORGANIZATION  127 

1.  The  men  and  women  in  the  organization  should  be 

selected  with  due  regard  to  their  fitness  for  the  work 
that  is  expected  of  them. 

2.  The  work  and  duties  of  every  member  of  the  organiza- 

tion should  be  sharply  defined  so  that  responsibility 
can  be  readily  located. 

3.  Orders  should  be  standardized,  so  that  no  feeling  may 

be  created  that  the  order  is  unreasonable  and  unfair 
as  between  different  employees. 

4.  Orders  from  executives  down  the  line  to  workers  and 

reports  from  workers  back  to  executives  should  all 
be  in  written  form  as  far  as  possible  to  avoid  mis- 
understandings and  disputes. 

5.  Every  member  of  the  organization  should  be  made  to 

feel  that  he  is  getting  a  "square  deal,"  should  be 
made  to  realize  that  only  teamwork  can  produce 
results.  His  interest  in  the  success  of  the  firm  and 
in  his  own  work  should  be  awakened. 

6.  Once   authority  has   been  delegated   the   executive 

should  never  interfere  with  the  work.  He  should 
hold  his  subordinates  responsible  for  results,  but 
should  encourage  them  to  exercise  fearlessly  initia- 
tive and  control.  Nothing  has  such  a  disintegrating 
effect  upon  the  organization  as  executive  inter- 
ference. 

The  Line  Organization.  As  the  number  of  workers 
increases  in  the  production  department,  the  super- 
vision may  be  still  further  divided,  and  foremen  ap- 
pointed who  are  directly  responsible  to  the  production 
manager  or  superintendent. 


128 


BUSINESS     ORGANIZATION 


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BUSINESS     ORGANIZATION  I29 

In  the  sales  department  a  similar  subdivision  may 
take  place,  and  heads  of  departments  may  divide 
among  them  the  supervision  of  advertising  and  of  the 
salesmen  in  the  field. 

The  office  department  may  also  be  subdivided. 
A  head  stenographer  then  controls  all  stenographic 
work,  a  head  bookkeeper  supervises  all  the  account- 
ing work,  and  a  head  correspondent  looks  after  all 
correspondence.  In  every  case,  these  minor  ex- 
ecutives are  directly  responsible  to  the  managers  of 
their  departments. 

The  type  of  organization  just  described  is  called  the 
line  organization,  for  authority  flows  in  a  straight  line 
from  manager  to  foreman,  and  from  foreman  to  work- 
men. 

Directing  our  attention  towards  the  production  de- 
partment, let  us  stop  for  a  moment  to  consider  what 
are  the  duties  of  a  foreman  under  this  type  of  organi- 
zation. In  a  plant  engaged  in  a  simple  continuous  or 
analytical  industry  his  job  is  simple  enough.  In  a 
flour  mill,  for  instance,  all  he  noeds  to  do  is  to  control 
the  speed  of  the  various  production  centers  and  to 
supervise  the  repairs  and  adjustments.  But  eve^i 
here  he  is  expected  to  do  some  things  for  which 
neither  his  training  nor  knowledge  fit  him.  One  of 
these  is  the  hiring  and  discharging  of  workmen.  In 
respect  to  that  function  he  is,  indeed,  a  little  poten- 
tate who  can  do  no  wrong,  for  frequently  there  is  no 
appeal  from  his  decision. 


I30  BUSINESS     ORGANIZATION 

The  Duties  of  the  Foreman.  In  a  factory  of  the 
assembling  type  things  are  worse.  Here  the  foreman 
is  called  upon  to  read  blue  prints,  to  interpret  them, 
to  explain  them  to  the  workmen,  to  aid  them  in  set- 
ting up  the  necessary  tools  and  machinery,  to  regu- 
late the  speed  of  the  machine  and  of  the  feed,  to  look 
after  repairs  and  upkeep  of  the  tools,  and  to  see  that 
workmen  are  supplied  with  the  proper  raw  materials 
at  the  right  time  and  in  the  right  place — these  are  but 
a  few  of  the  many  matters  that  demand  his  attention. 
If  he  is  unfortunate  enough  to  work  in. a  factory 
where  no  very  definite  departments  exist  so  that  the 
spheres  of  authority  of  the  foremen  are  not  sharply 
defined,  he  must  not  only  perform  the  many  duties 
enumerated,  but  he  may  spend  part  of  his  time  in 
argument  with  his  fellow  foremen  to  determine 
where  the  authority  of  one  begins  and  that  of  the 
other  leaves  off.  Wherever  lines  of  authority  are  not 
sharply  drawn  the  tendency  will  be  for  men  to  shift 
responsibility  upon  others.  ^ 

This  is  not  an  exaggerated  picture.  Many  plants 
are  operated  on  a  plan  very  similar  to  the  one  de- 
scribed. It  is  small  wonder,  therefore,  that  no  very 
great  efificiency  results.  The  demands  placed  upon 
the  foreman  are  often  superhuman  demands.  An  all- 
round  man  may  attend  to  all  these  functions  fairly 
well,  but  he  cannot  be  expected  to  achieve  maximum 
efficiency  in  all  of  them.  The  principal,  and  some 
claim  the  sole  advantage,  of  this  type  of  management 


BUSINESS     ORGANIZATION  I3I 

lies  in  its  simplicity  and  in  the  ease  with  which  re- 
sponsibility can  be  located. 

The  worst  feature  of  this  type  of  organization  lies 
in  the  relationship  of  the  members  to  each  other.  In 
order  to  secure  maximum  efficiency,  it  is  necessary  to 
secure  whole-hearted  and  enthusiastic  teamwork. 
But  everything  seems  to  indicate  that  real  teamwork 
cannot  be  expected  to  develop  naturally  in  this  kind 
of  organization. 

What  Keeps  the  Men  at  Work?  The  superintendent 
must  show  results.  He  can  only  show  results  if  the 
foremen  show  results  in  their  various  departments, 
and  they  in  turn  depend  upon  their  workmen.  The 
system,  therefore,  frequently  deteriorates  into  a  sys- 
tem of  driving.  The  manager  drives  the  superin- 
tendent, the  superintendent  the  foreman^  and  the 
foreman  speeds  up  the  workmen.  This  is  often  called 
drive-management.  "Keep  busy"  and  "Step  lively" 
are  the  mottoes  of  this  type  of  management.  It  is  all. 
the  more  vicious  since  no  one  in  the  organization  has 
a  very  definite  notion  of  what  constitutes  a  fair  day's 
work. 

Every  workman  has  his  own  notion  about  the  tools 
which  he  should  use,  and  uses  them  according  to 
his  own  method.  There  is  little  uniformity  in  the 
methods  of  work  of  the  men,  and,  therefore,  little 
uniformity  in  time  and  in  quantity  of  output.  If 
asked  how  long  a  job  should  take,  almost  every  man 
would  give  a  different  answer.    Everything  is  based 


132  BUSINESS     ORGANIZATION 

on  guesswork  and  those  who  do  the  work  have  noth- 
ing to  gain  by  aiding  their  overseers  to  arrive  at  a 
fairly  accurate  estimate.  Soldiering,  loafing  on  the 
job,  making  work,  are  all  bred  under  this  kind  of 
management.  The  manager  and  the  foremen  want 
maximum  output;  the  workmen  have  nothing  to 
gain  by  increasing  the  output.  By  unusual  exertion 
they  would  merely  set  a  higher  standard  for  them- 
selves and  others,  which  they  will  be  forced  to  equal 
from  then  on  with  no  reward  if  they  attain  it. 

The  principal  driving  force  in  such  a  system  of 
management  is  fear.  The  fear  of  discharge  is  held 
over  the  heads  of  the  workmen  as  a  club.  The  few 
workmen  who  would  excel  are  held  back  by  the 
criticism  and  illwill  of  their  fellow  workmen  who 
resent  a  speeder,  and  frequently,  also,  by  the  illwill 
of  the  foreman  who  is  always  more  or  less  in  fear  of 
having  to  give  up  his  job  to  some  workman  of  ex- 
ceptional ability.  The  foreman  is  afraid  of  being 
shown  up.  It  is  little  wonder,  therefore,  that  the 
ambition  of  many  workmen  soon  becomes  to  do  as 
little  as  they  can  without  being  discharged. 

The  Problem  of  Securing  Co-operation.  The  modem, 
wide-awake  manager  is  not  satisfied  with  the  old 
type  of  management  and  seeks  in  some  way  to  intro- 
duce other  elements  into  the  organization  in  order 
that  co-operation  and  teamwork  may  take  the  place 
of  driving. 


BUSINESS     ORGANIZATION  I33 

We  discover  as  we  study  this  primitive  method  of 
management  that  its  faults  are  principally: 

1.  The  foreman  is  expected  to  do  too  many  unrelated 

things. 

2.  There  is  a  general  lack  of  information  as  to  what 

constitutes  a  normal  amount  of  work.     . 

3.  There  is  no  other  incentive  given  the  workmen,  except 

fear  of  discharge. 

The  interesting  thing  is  that  the  first  two  faults 
are  both  the  result  of  a  misconception  of  the  true 
function  of  management.  This  needs  to  be  explained 
in  more  detail. 

Every  productive  act  may  be  analyzed  into  three 
parts:  first,  the  idea;  second,  the  planning  of  the 
processes  by  which  the  idea  may  be  materialized; 
and  third,  the  actual  doing  or  the  execution.  Sup- 
pose that  we  are  asked  to  write  an  essay,  we  would 
not  start  in  writing  until  we  knew  what  we  were  going 
to  tell  and  until  we  had  a  fairly  definite  notion  as  to 
how  we  were  going  to  tell  it.  If  these  two  preliminary 
stages  are  completed,  the  writing  itself  is  relatively 
simple.  Of  course,  the  actual  writing  demands  great 
skill,  but  it  is  skill  of  a  different  type.  It  is  skill  in 
doing,  while  the  thought  and  outline  demand  skill  in 
planning.  And  so  it  is  whenever  anything  is  to  be 
produced.  The  planning  precedes  the  execution  and 
demands  a  different  type  of  knowledge  and  skill. 

What  causes  the  confusion  in  the  old  organization 
is  that  both  foremen  and  workmen  are  called  upon 


134  BUSINESS     ORGANIZATION 

to  do  a  great  many  things  which  should  have  been 
done  for  them.  And  because  they  have  been  custo- 
marily expected  to  do  so  many  things  which  really 
lie  outside  their  sphere,  no  one  has  paid  very  much 
attention  to  their  efficiency  in  doing  the  work  which 
was  specifically  theirs. 

No  one  would  expect  a  workman  at  the  bench  to 
design  a  motor  or  some  other  complicated  piece  of 
machinery.  He  has  not  been  trained  to  do  this.  It 
is  equally  unreasonable  to  expect  a  workman  or  a 
foreman  to  interpret  the  drawing  and  to  know  the 
best  way  of  planning  the  execution  of  the  article. 

In  other  words,  as  managers  begin  to  look  for  a 
way  of  simplifying  the  work  of  the  foreman  so  that  it 
may  be  possible  to  hnd  some  one  capable  of  filling 
the  position,  they  discover  that  the  first  step  should 
be  to  relieve  him  of  all  the  planning  work.  Such 
work  should  be  done  by  the  msinagement  and  should 
not  be  left  to  the  shop. 

Some  factories  are  subdivided  into  a  large  number 
of  sharply  separated  departments,  which  all  receive 
orders  from  and  render  reports  to  some  central  office 
or  executive.  Every  department  can  then  be  made 
small  enough  to  allow  one  man  to  supervise  it  prop- 
erly and  to  attend  to  all  the  functions  of  the  foreman. 
This  simplified  the  work  of  the  foremen,  but  it  does 
not  solve  the  problem  of  taking  out  of  their  hands 
the  various  management  functions,  neither  does  it 


BUSINESS     ORGANIZATION  135 

solve  the  problem  of  a  more  cordial  relation  between 
workman  and  manager. 

In  this  and  the  following  two  chapters  we  shall 
study  various  methods  used  in  plants,  offices,  and 
stores  to  create  a  family  spirit  in  the  business  con- 
cern. We  shall  see  that  the  methods  fall  into  four 
groups : 

1 .  A  different  kind  of  management  changing  the  flow  of 

authority  and  defining  more  and  more  sharply  the 
work  demanded  of  each  man. 

2.  Various  ways  of  rewarding  the  workman. 

3.  Concentrating  the  control  of  the  working  force  in  a 

separate  department;  taking  control  of  hiring  and 
discharging  the  employees  out  of  the  hands  of  the 
person  in  charge  of  operation. 
'4.  Various  "welfare"  schemes  intended  to  elevate  the 
workman  morally  and  mentally,  and  to  teach  him 
the  value  of  co-operation. 

It  is  never  good  policy  to  drive  a  person  against  his 
will.  The  only  successful  kind  of  management  is  one 
based  not  on  driving  but  on  leadership.  Leadership 
is  the  capacity  to  make  men  pull  together  toward  a 
common  goal.  That  is  the  central  problem  of  the 
manager.  The  first  step  in  the  right  direction  is  to 
make  the  work  demanded  of  men  reasonable  and 
adapted  to  their  capacity.  The  establishing  of  a 
planning  department  between  the  drafting  room  and 
the  shop  is  a  result  of  this  demand. 


136  BUSINESS     ORGANIZATION 

The  Planning,  Instead  of  handing  to  the  foreman 
a  copy  of  a  blue  print  and  telling  him  to  go  ahead, 
the  manager  will  insist  that  this  print  be  first  care- 
fully analyzed  by  the  planning  department.  A  pro- 
duction order  is  here  made  out  which  is  a  list  of  the 
component  parts  of  the  articles  to  be  produced.  This 
makes  it  possible  to  tell  first  of  all  what  parts  are 
ready  in  stock;  second,  what  parts  must  be  bought 
outside;  and  third,  what  parts  should  be  made  in 
the  shop. 

The  planning  department  should  now  plan  the 
work  carefully.  Suppose  that  the  finished  article  is 
to  be  completed  on  the  first  of  November  or  there- 
abouts. Suppose  further  that  the  actual  assembling 
will  take  about  a  week.  Then  the  planning  depart- 
ment will  know  that  all  component  parts  must  be 
ready  for  assembling  not  less  than  a  week  before  the 
first  of  November  or  about  October  twenty-fifth. 
Some  parts  may  have  to  be  ordered.  The  purchasing 
department  is  notified  to  see  to  it  that  such  parts  are 
ordered  and  are  on  hand  in  time.  Special  tools  may 
also  be  ordered  ahead  in  this  way  so  that  they  will  be 
on  hand  when  needed. 

Now  the  work  of  each  part  to  be  produced  may  be 
planned.  A  part  which  requires  three  weeks  to  be 
completed  should  be  started  in  ample  time  so  that  it 
may  be  ready  for  assembling,  and  must  be  started 
just  two  weeks  before  a  part  requiring  only  one  week 
for  completion  is  begun. 


BUSINESS     ORGANIZATION  137 

The  planning  department  should  have  a  record  of 
each  machine,  of  the  work  which  is  in  process  on  the 
machine,  and  of  the  work  which  is  waiting  to  be 
done.  A  bulletin  board  is  frequently  used  for  this 
purpose  with  two  clips  or  pockets  for  each  machine, 
one  for  in  process j  the  other  for  assigned  work  cards. 
It  is  then  possible  to  tell  with  little  trouble  which 
machine  will  be  ready  to  undertake  the  new  piece  of 
work  on  time.  The  storeroom  is  now  notified  to  set 
aside  the  required  raw  materials. 

The  next  thing  is  to  draw  up  careful  instructions 
to  the  workman,  telling  him: 

1.  What  he  is  expected  to  make. 

2.  What  is  the  best  way  of  making  it. 

3.  How  long  the  job  should  take. 

It  is  easily  seen  that  the  giving  of  these  instruc- 
tions is  a  part  of  the  work  of  the  management,  while 
the  foreman  should  see  that  the  instructions  are  fol- 
lowed. This  is  a  logical  division  of  authority  and  is 
a  reasonable  task  to  set  the  foreman. 

Lack  of  Accurate  Knowledge  Becomes  Evident,  So 
far  everything  has  gone  smoothly,  but  when  one  is 
called  upon  to  give  instructions,  it  is,  first  of  all, 
necessary  that  the  one  giving  the  instructions  possess 
definite  and  accurate  information. 

Go  into  any  shop  and  ask  the  opinion  of  a  number 
of  workmen  regarding  the  best  way  of  doing  a  cer- 
tain piece  of  work,  the  speed  of  the  machine,  the 


138  BUSINESS     ORGANIZATION 

correct  kind  of  tool  to  use,  how  fast  the  rough  piece 
to  be  worked  must  be  fed  under  the  tool,  and  a 
variety  of  other  questions,  and  every  man  in  the 
shop  will  have  a  different  answer.  Call  in  the  mana- 
ger or  the  foreman  and  the  confusion  will  only  be 
increased.  And  still  these  are  all  physical  facts 
which  cannot  be  settled  by  opinion,  or  guess  work, 
or  majority  vote,  any  more  than  an  answer  can  be 
found  by  any  of  these  methods  to  tjie  question, 
"How  many  miles  can  this  machine  run  on  one  gallon 
of  gasoline?" 

All  such  physical  facts  may  be  determined  by  sci- 
entific methods.  If  it  is  a  question  of  what  kind  of 
tools  should  be  used  for  a  certain  machine  process, 
experiments  may  give  the  answer,  not  approximately 
right,  but  with  absolute  accuracy.  It  is  the  same 
with  all  the  other  intricate  mechanical  problems  of 
the  shop.  It  cannot  be  denied  that  it  is  important 
that  the  best  way  of  doing  a  piece  of  work  should  be 
discovered  before  the  work  is  undertaken.  It  is  plain 
that  in  no  other  way  can  maximum  efficiency  be 
obtained. 

It  is  of  equal  importance  that  the  workman  should 
be  properly  trained  to  do  the  work  in  that  way  and 
that  he  should  be  supplied  with  the  proper  facilities. 
Finally,  it  also  seems  logical  that  in  some  way  the 
workingman  must  be  interested  in  the  results  to  be 
obtained.  These  almost  self-evident  principles,  how 
ever,  are  to  a  large  degree  violated  in  most  business 


BUSINESS     ORGANIZATION  139 

concerns.  They  operate  successfully  but  can  never 
hope  to  reach  their  maximum  efficiency  until  all 
guesswork  has  been  eliminated  and  displaced  by 
accurate  information. 

Scientific  Management,  The  system  of  manage- 
ment which  aims  to  apply  these  principles  and  which 
endeavors  to  eliminate  all  guesswork  and  to  place 
all  information  and  instructions  regarding  the  work 
in  the  shop  on  a  truly  scientific  basis  is  called  scien- 
tific  management,  or  sometimes,  after  its  originator, 
the  Taylor  system  of  management. 

This  system  will  now  be  described,  but  before  any- 
thing further  is  said,  it  must  be  understood  that  the 
preliminary  work  of  installing  such  a  system  is  ex- 
tremely costly  and  few  concerns  can  afford  to  go  to 
the  expense  of  adopting  it.  This  does  not,  however, 
destroy  the  value  of  a  study  of  the  system,  for  every 
concern  can  introduce  some  features  of  the  system, 
and  thereby  greatly  increase  its  efficiency.  Our  main 
interest  in  this  method  of  management  is  in  the  prin- 
ciple which  it  illustrates,  namely,  how  business  may 
profit  by  a  scientific  approach  to  its  problems. 

The  Management  Should  Look  After  All  Management 
Functions.  This  is  the  first  principle  which  scientific 
management  considers  as  fundamental.  The  estab- 
lishment of  a  planning  department  is  in  recognition 
of  this  principle  and  scientific  management  carries 
this  principle  to  its  logical  conclusion.  The  practical 
result  is  that  the  planning  department  is  now  sub- 


I40  BUSINESS     ORGANIZATION 

divided  into  four  functions,  each  intrusted  to  a  clerk 
or  a  group  of  clerks.    The  clerks  are : 

1.  The  routing  clerk.    His  duty  is  to  plan  the  routing  of 

the  work  through  the  factory.  He  determines  when 
work  is  to  b$  started  and  what  workmen  or  machine 
is  to  do  it. 

2.  The  instruction  card  clerk.     This  clerk  makes  out 

careful  instructions  for  the  workmen  to  follow.  In 
order  to  enable  this  clerk  to  give  such  instructions 
he  must  be  supplied  with  information  from  the 
drafting  room,  and  from  the  scientific  laboratory, 
where  experiments  are  constantly  carried  on.  He 
may  also  receive  information  which  has  been  filed 
by  the 

3.  Cost  and  time  clerk.    This  clerk  collects  all  informa- 

tion of  past  performances,  showing  the  time  re- 
quired to  perform  a  certain  piece  of.  work,  and  also 
such  information  as  may  become  available  through 
the  laboratory  which  carries  on  all  time  studies. 
This  clerk  determines  the  standard  time  for  each 
piece  of  work.  This  information  is  also  entered 
upon  the  instruction  card,  for,  as  we  shall  see  later, 
a  workman  under  this  method  of  management  is 
usually  rewarded  with  reference  to  whether  he  per- 
forms a  "standard  task,"  or  whether  he  falls  below  it 
or  exceeds  it. 

As  a  cost  clerk,  the  clerk  collects  all  information 
which  comes  to  him  from  the  shop  in  regard  to  the 
time  spent  in  finishing  a  job  in  all  its  various  stages. 
This  information  reaches  him  on  the  workmen's 
cards  which  give  the  rate  of  pay  of  the  workmen  and 


BUSINESS     ORGANIZATION  I4I 

the  time  spent  on  each  job.  From  this  information 
the  clerk  makes  up  the  joh  cost  and  the  time  sheet. 
The  latter  is  a  statement  of  the  wages  due  to  each 
workman. 

4.  The  shop  disciplinarian.  He  settles  disputes  between 
v.  workmen  among  themselves,  between  workmen 
and  foremen,  and  looks  into  questions  which  are 
submitted  to  him  by  foremen  or  planning  depart- 
ment officials,  whenever  the  human  element  is 
involved.  In  this  way,  the  disciplinary  control 
over  the  working  force  is  taken  out  of  the  hands  of 
the  shop  foremen  as  being  a  managerial  function. 

In  the  shop  the  only  work  that  remains  now  is  to 
execute  the  work  by  following  the  instructions  intelli- 
gently. It  cannot  be  said  that  the  workmen  and 
foremen  need  not  exercise  thought  because  a  part 
of  their  thinking  has  been  done  for  them — they  are 
as  much  required  to  think  and  to  be  wide  awake  as 
an  automobile  driver  when  passing  through  a  crowded 
street.  He  knows  the  rules  of  traffic,  he  knows  he 
should  not  try  to  push  the  car  in  front  of  him,  nor 
stop  so  suddenly  as  to  cause  a  collision  with  the  car 
behind.  His  instructions  are  all  clear,  he  knows  the 
mechanism  of  his  car,  and  yet  it  can  hardly  be 
claimed  that  he  does  not  need  judgment  and  intelli-. 
gence.  In  the  case  of  the  workman  in  the  shop,  so 
much  is  left  for  him  to  determine  that  one  of  the  most 
important  functions  of  the  foreman  is  to  instruct  him 


142  BUSINESS     ORGANIZATION 

and  aid  him  in  following  instructions  and  in  achieving 
the  standard  set  for  the  work. 

As  far  as  the  supervision  of  the  work  of  the  shop 
is  concerned,  this  also  takes  on  a  different  aspect 
when  scientific  management  is  introduced.  The  fore- 
man who  looked  after  everything  is  now  supplanted 
by  specialists : 

1.  The  instructor  or  gang  boss,  who  aids  the  workman 

in  following  instructions  and  teaches  him  to  reach 
the  greatest  efficiency. 

2.  The  repair  boss,  who  sees  to  it  that  the  machine  is  in 

good  repair. 

3.  The  machine  speed  boss,  who  adjusts  the  speed  and 

oversees  the  transmission  of  power. 

4.  The  inspector.     This  specialist  is  necessary  because 

without  him  workmen  might  be  content  to  increase 
their  output  at  the  expense  of  quality. 

The  Human  Factor.  In  the  shop  the  work  is  done 
not  only  by  machines  but  by  men  and  women.  Up 
to  this  point  we  have  spoken  of  efficiency  in  manage- 
ment as  if  it  were  principally  a  matter  of  finding  the 
right  tool  and  the  right  machine  for  the  purpose. 

But  the  whole  question  of  machinery  and  tools  is 
secondary  as  compared  with  the  problem  of  securing 
maximum  efficiency  from  the  human  factor  in  pro- 
duction. 

The  term  maximum  efficiency  has  an  antagonizing 
effect  upon  the  minds  of  many  people.  They  at  once 
think  of  a  cruel,  unfeeling  slave  driver  speeding  the 


BUSINESS     ORGANIZATION  I43 

worker  to  ever  greater  and  greater  exertion,  and 
greater  output  until  at  last,  broken  in  body  and 
spirit,  the  worker  gives  way  to  others. 

Maximum  efficiency  cannot  exist  under  such  con- 
ditions of  management.  True  efficiency  is  not  mea- 
sured solely  in  the  output  of  to-day,  but  in  sustained 
outputy  and  it  is  impossible  to  maintain  a  rate  of  out- 
put which  is  procured  at  the  sacrifice  of  health  and 
vigor.  In  order  to  secure  true  efficiency  the  work- 
man must  be  made  the  subject  of  careful  study.  Such 
a  study  of  the  human  element  and  the  subsequent 
changes  in  technique  will  usually  require  the  follow- 
ing steps: 

1 .  Careful  analysis  of  the  work. 

2.  Elimination  of  all  unnecessary  motions. 

3.  A  thorough  training  in  the  necessary  motions  so  that 

the  right  rhythm  and  speed  is  obtained. 

4.  Careful  attention  to  the  comfort  of  the  worker  and 
5.  Well-planned  rest  periods. 

Motion  Study.  When  watching  a  group  of  men  at 
work,  one  is  very  soon  impressed  by  the  fact  that 
some  seem  extremely  industrious,  while  others  are 
slow-moving  and  deliberate.  There  is  a  great  tempta- 
tion to  jump  to  the  conclusion  that  the  easy-going 
man  is  lazy,  and  is  far  less  productive  than  the  active 
fellow.  It  is  a  curious  thing,  however,  that  the  very 
opposite  may  be  true. 

The  reason  why  one  man  seems  so  much  more  ac- 
tive than  some  other  worker  at  the  same  task  is  that 


144  BUSINESS     ORGANIZATION 

he  "fusses  around,"  goes  through  a  great  many  un- 
necessary motions.  Once  this  is  recognized  it  is 
easily  seen  that  efficiency  can  be  increased  by  elimi- 
nating all  unnecessary  motions,  and  by  concentrating 
upon  those  which  are  really  productive.  Greater  out- 
put may  then  be  secured  with  the  same  amount  of 
energy. 

In  The  New  Industrial  Day  Mr.  W.  C.  Redfield 
states  this  in  the  following  words: 

The  day  of  the  "rule  of  thumb"  in  our  factories  is  not 
yet  ended,  though  its  sun  is  setting.  Many  superin- 
tendents manage  to-day  as  they  managed  of  yore — true 
offspring  of  the  industrial  conditions  under  which  they 
grew  up.  There  is  a  fearful  waste  of  energy,  of  human 
strength  and  thought,  and  even  of  life,  and  waste  also  of 
time  and  of  material  and  of  attention  given  relatively 
trivial  things,  while  more  serious  matters  pass  unnoticed. 
We  h^ve  depended  much  heretofore  on  mere  drive,  or  as 
we  call  it  "hustling" — crowding  into  the  compressed  hours 
of  busy  days  more  and  more,  and  winning  out  by  inten- 
sity of  effort  and  by  dint  of  strenuous  application  rather 
than  by  the  scientific  efficiency  which  saves  all  waste 
and  applies  the  principle  of  the  least  effort  to  produce  the 
greatest  result. 

Many  unnecessary  motions  often  result  from  the 
fact  that  the  raw  material  is  not  placed  conveniently, 
and  that  the  fiiiished  product  may  have  to  be  re- 
moved by  the  worker  to  some  distant  point.  The 
saving  which  may  result  from  eliminating  these  un- 


BUSINESS     ORGANIZATION  I45 

necessary  efforts  is  easily  seen.  It  is  more  difficult, 
however,  to  discover  the  unnecessary  motions  in  the 
performance  of  the  work  itself.  One  way  to  dis- 
cover them  is  to  take  moving  pictures  of  the  work- 
man as  he  works  and  to  study  these.  The  paths  over 
which  his  body  and  his  hands  travel  may  then  be 
studied,  and  all  unnecessary  motions  may  be  iso- 
lated. It  is  quite  possible  to  study  such  work  with- 
out the  use  of  a  camera,  though  it  frequently  requires 
a  skilled  eye  to  see  just  what  is  going  on. 

What  can  be  accomplished  by  a  study  of  this  kind 
is  well  illustrated  by  the  classical  example  of  the 
bricklayer.  People  were  laying  bricks  as  long  ago 
as  the  days  of  the  Babylonians.  It  was,  therefore, 
reasonable  to  expect  that  of  all  work,  the  laying  of 
bricks  would  be  one  of  the  most  efficient.  But  evi- 
dently experience  and  traditional  workmanship  have 
much  to  learn  from  scientific  analysis.  It  was  dis- 
covered that  an  ordinary  bricklayer  goes  through  at 
least  eighteen  or  nineteen  motions  to  lay  one  brick. 
By  changing  the  position  of  the  bricks  and  of  the 
mortar,  by  raising  the  scaffold  so  that  the  bricklayer 
never  needed  to  exert  himself  to  reach  the  top  of  the 
wall,  by  careful  mixing  of  the  mortar  which  made  it 
unnecessary  to  give  the  brick  the  traditional  taps  to 
make  it  slide  into  place,  and  by  a  few  other  similar 
small  changes,  the  number  of  movements  was  reduced 
from  eighteen  to  from  four  to  six,  and  the  output 
increased  from  i,ooo  to  2,700  bricks  a  working  day. 


146  BUSINESS     ORGANIZATION 

Gilbreth,  one  of  the  early  exponents  of  scientific 
management,  describes  his  experiences  at  the  Indus- 
trial Exposition  of  London,  where,  after  watching  a 
girl  at  work  for  a  short  time,  he  introduced  a  number 
of  improvements  which  resulted  in  a  reduction  of  the 
time  required  to  put  a  paper  cover  on  twenty-four 
boxes,  from  forty  seconds  to  twenty-six  and  finally 
to  twenty  seconds. 

After  all,  in  these  wonderful  performances  there 
need  be  little  that  surprises  us,  for  we  constantly  see 
all  around  us  examples  of  similar  increased  efficiency 
resulting  from  an  analysis  of  the  work,  followed  by 
instruction.  The  touch  method  of  typewriting  is  a 
good  case  in  point.  A  careful  study,  eliminating  all 
unnecessary  movements  has  preceded  careful  train- 
ing so  that  the  right  habits  may  be  formed.  Muck 
of  the  workman's  inefficiency  is  the  result  of  wrong 
habits,  which  he  acquired  partly  through  imitating 
others  from  whom  he  learned  his  trade,  and  partly 
through  individual  variation.  It  is  a  part  of  the 
management  of  a  factory  to  see  to  it  that  the  workers 
acquire  the  right  kind  of  work  habits.  Given  the 
right  kind  of  tools,  it  is  possible  to  arrive  at  the  best 
way  for  a  man  to  work  with  the  tool.  It  now  rests 
with  the  management  to  make  it  worth  while  for  the 
workman  to  learn  to  do  his  work  in  this  one  best 
way,  to  break  old  habits,  and  to  acquire  new  ones. 

Rest  Periods  Must  Be  Planned.  It  must  always  be 
remembered  that  maximum  efficiency  cannot  be  ob- 


BUSINESS     ORGANIZATION  I47 

tained  by  driving,  A  wise  manager  not  only  frowns 
on  driving  by  foremen  or  superintendent,  but  he  pro- 
tects a  workman  against  his  own  ambition.  Rest 
periods  of  sufficient  frequency  and  length  to  allow 
for  complete  recuperation  are  absolutely  essential. 
This  means  not  only  that  the  working  day  must  be 
short  enough  to  allow  for  ample  rest  in  the  evening 
and  during  the  night  so  that  the  worker  may  return 
refreshed  to  the  morning's  work,  but  it  also  means 
that  the  work  must  be  interrupted  whenever  a  cer- 
tain degree  of  fatigue  is  reached. 

The  experience  of  managers  is  practically  unani- 
mous that  a  change  from  a  ten-hour  day  to  an  eight- 
hour  day  has  resulted  in  more  work  of  a  higher 
quality.  This  must  not  be  taken  to  mean  that 
therefore  six  hours  is  better  than  eight,  and  four 
better  than  six — 2l  certain  amount  of  fatigue  is  a 
good  thing,  physically  and  mentally.  The  man  who 
never  works  past  the  first  feeling  of  fatigue  until  he 
gets  his  "second  wind"  never  discovers  his  latent 
strength,  and  gradually  deteriorates.  Many  people 
think  they  are  tired  when  they  are  merely  lazy  and 
have  not  even  started  to  exert  themselves. 

Two  examples  may  be  quoted  to  show  how  more 
rest  resulted  in  larger  output.  In  one  bicycle  factory 
120  girls  worked  ten  and  one-half  hours  a  day.  The 
manager  called  in  a  scientific  management  expert 
who,  after  bringing  some  minor  improvements,  cut 
the  working  day  to  eight  and  one-half  hours  and 


148  BUSINESS     ORGANIZATION 

allowed  one  ten-minute  rest  period  in  the  middle  of 
the  fore-noon  and  one  in  the  afternoon.  It  was 
discovered  that  thirty-five  girls  weie  now  able  to  do 
the  work  which  once  required  120  girls. 

H.  L.  Gantt  tells  of  a  bleaching  plant  where  be- 
sides forty-five  minutes  for  lunch,  the  girls  were 
allowed  two  forty-five  minute  rest  periods  during  the 
day.  The  work  was  extremely  fatiguing  and  Gantt 
suggested  that  the  day  be  divided  into  working 
periods  of  one  hour  and  twenty  minuses  each,  sep- 
arated by  twenty  minute  rest  periods,  while  spare 
hands  filled  in  during  the  intervals.  The  result  was 
a  better  spirit,  better  health,  and  an  increase  of  60 
per  cent  in  the  output. 

Other  Considerations,  It  is  not  sufficient  that  the 
worker  be  given  ample  time  for  recuperation ;  unless 
this  time  is  wisely  spent,  the  leisure  period  may  leave 
him  less  fit  than  it  found  him.  The  manager  has  a 
direct  interest  in  the  kind  of  pleasures  that  attract 
the  workers  and  in  the  morality  and  the  intellectual 
life  of  his  employees.  How  managers  aid  their  em-, 
ployees  in  improving  themselves,  in  cultivating 
habits  of  thrift,  and  a  high  standard  of  pleasures  will 
be  described  in  the  next  two  chapters.  In  the  same 
chapters  will  also  be  studied  the  methods  used  to  give 
the  workman  a  vital  interest  in  his  own  efficiency 
and  in  that  of  his  fellow  workers. 

Summary,  The  manager  brings  together  the  vari- 
ous elements  of  production  and  organizes  them  into 


BUSINESS     ORGANIZATION  I49 

a  working  and  producing  organization.  The  ef- 
ficiency of  this  organization  depends  largely  upon 
the  willingness  on  the  part  of  the  workers  to  co-oper- 
ate and  upon  the  efficiency  of  the  physical  plant. 
The  problem  of  management  is  primarily  a  human 
problem.  Management  resolves  itself  into  the  follow- 
ing questions :  How  must  the  work  be  divided  among 
the  personnel?  Who  shall  bear  the  responsibility  for 
the  different  functions?  How  shall  the  efficiency  of 
each  man  be  controlled  and  increased?  Different 
types  of  internal  organization  are  found.  The  line 
organization  is  most  common.  This  may  be  modified 
by  adding  planning  depairtments,  or  by  a  subdivision 
into  many  smaller  departments.  Scientific  manage- 
ment is  another  type.  This  rests  on  the  application 
of  the  laboratory  method  to  industry,  and  on  the 
separation  of  all  work  into  functions.  No  method  of 
management  is  successful  which  neglects  to  take  full 
account  of  the  human  factor. 

REFERENCES 

W.  C.  Redfield.  The  New  Industrial  Day.  The  Century 
Co. 

E.  D.  Jones.  The  Administration  of  Industrial  Enter- 
prises.   Longmans,  Green,  and  Company. 

J.  C.  Duncan.  The  Principles  of  Industrial  Management. 
D.  Appleton  and  Company. 

H.  Diemer.  Industrial  Organization  and  Management. 
La  Salle  Extension  University. 


150  BUSINESS     ORGANIZATION 

C.  C.  Parsons.    Office  Organization  and  Management.    La 
Salle  Extension  University. 

D.  S.  Kimball.    Plant  Management,    Alexander  Hamilton 
Institute. 

H.  L.  Gantt.     Industrial  Leadership.     Yale  University 
Press. 

QUESTIONS  FOR  FURTHER  STUDY 

1.  What  is  meant  by  the  line  and  staff  organization? 
Duncan.    Chapter  XIII. 

Parsons.    Chapter  I. 

2.  What  are  some  of  the  criticisms  of  scientific  man- 
agement? 

Reference:   Duncan.    Chapter  XIII. 
Jones.    Chapter  VII. 

3.  Do  high  wages  always  mean  high  costs? 
Reference:   Redfield.    Chapters  II,  IV,  V. 

•  4.   What  is  meant  by  democratizing  industry? 

Reference:   Gantt.    Chapter  I. 
5.    In  what  respect  does  the  scientific  attitude  differ 
from  the  traditional  method  of  approach  to  business  prob- 
lems? 

Reference:   Jones.    Chapter  I. 

Redfield.    Chapter  I. 

TEST  QUESTIONS 

1 .  What  is  meant  by  a  production  order? 

2.  What  are  the  fundamental  principles  which  must  be 
observed  in  all  systems  of  management? 

3.  Why  is  it  desirable  to  install  a  planning  department 
in  a  factory?  * 


BUSINESS     ORGANIZATION  151 

4.  How  is  the  shop  organized  under  scientific  manage- 
ment? / 

5.  Can  you  explain  how  the  principle  of  functional 
management  would  work  out  in  the  management  of  a 
baseball  game,  or  of  a  dramatic  performance? 

6.  Most  people  give  little  thought  for  the  future. 
They  do  not  look  far  ahead.  Suppose  that  you  were 
asked  to  apply  the  method  and  principles  of  scientific 
management  to  securing  the  greatest  efficiency  in  the 
management  of  your  own  life;  how  would  you  proceed? 


152  BUSINESS     ORGANIZATION 


CHAPTER  VIII 

THE  WAGE  QUESTION 

What  the  Employer  Buys.  In  the  preceding  chap- 
ters we  saw  that  more  and  more  business  men  are 
beginning  to  be  convinced  that  it  is  possible  to 
analyze  work  in  the  shop  and  even  in  the  office  and 
to  discover  how  to  do  a  piece  of  work  with  maximum 
efficiency.  The  employer's  next  concern  is  with  the 
willingness  of  the  employee  to  break  away  from  old 
habits  and  to  learn  to  work  according  to  new 
methods. 

The  first  method  that  suggests  itself  to  secure  the 
co-operation  of  the  workingman  is  to  give  him  an 
interest  in  tlie  output.  He  must  be  made  to  realize 
that  his  earnings  depend  upon  his  performance.  This 
opens  a  fundamental  question  in  the  wage  situation, 
namely,  *What  does  an  employer  buy  when  he  hires 
a  workingman?" 

He  Buys  a  Workingman' s  Time.     The  Day  Wage. 

Some  claim  that  he  buys  the  workingman's  time. 
This  is  the  point  of  view  that  lies  at  the  bottom  of  the 
old  day  wage,  i.  e.y  every  man  receives  a  daily  wage 
irrespective  of  the  amount  of  work  he  does.  He 
checks  in  in  the  morning  and  checks  out  in  the  even- 


BUSINESS     ORGANIZATION  I53 

ing,  and  he  receives  pay  according  to  the  number  of 
hours  he  spends  in  the  plant  or  store. 

The  advantages  of  the  day  wage  are  easily  seen. 
It  is  simple  and  it  assures  the  worker  a  regular  in- 
come. He  may,  therefore,  adjust  his  standard  of 
expenditure  to  his  wage  and  feel  fairly  certain  that 
he  can  meet  his  bills  as  they  fall  due. 

The  disadvantages  are  equally  apparent.  It  is  im- 
possible to  give  a  real  incentive  for  good  work  to  the 
workingmen.  They  all  receive  a  day  wage  and  this 
wage  is  determined  by  the  kind  of  work  demanded  of 
them  with  no  definite  relation  to  the  amount  they 
do.  It  is  to  the  interests  of  the  management  to  make 
the  workingmen  work  as  fast  as  possible,  but  the 
interests  of  the  workingmen  are  directly  in  opposi- 
tion to  this.  He  is  anxious  to  work  as  little  as  he 
can  for  the  wage  he  receives.  Some  few  really  good 
workmen  who  like  to  be  active,  who  get  pleasure  out 
of  work  for  its  own  sake,  are  exceptions,  but  most  of 
them  must  be  driven  to  work. 

Employers,  therefore,  introduce  all  kinds  of 
schemes  to  make  their  men  work.  They  adjust  the 
production  centers  so  delicately  that  the  machine- 
speed  forces  men  to  keep  up  a  certain  rate  of  speed. 
They  introduce  more  highly  paid  workmen  who  set 
the  pace.  They  pay  high  wages  to  foremen  who 
know  how  to  "get  the  work  out  of  the  workmen." 
They  allow  these  foremen  the  power  to  hire  and  fire 
the  workers  and  to  hold  the  fear  of  discharge  over 


154  BUSINESS     ORGANIZATION 

their  heads  as  a  weapon.  The  workmen  dealt  with 
in  this  way  naturally  feel  more  or  less  resentful. 
Many  of  our  industrial  disturbances  may  be  directly 
traced  to  this  situation.  The  most  objectionable 
feature  of  the  old-fashioned  method  of  payment  is 
that  workmen  are  dealt  with  in  a  group.  A  man  is  a 
carpenter  or  a  bricklayer  or  a  rigger,  and  the  wage  he 
receives  is  the  wage  of  the  group.  As  an  individual 
he  is  nothing.  If  he  is  anxious  to  increase  his  earn- 
ings or  shorten  his  working  time,  he  must  combine 
with  others  in  his  group  to  press  the  demand.  The 
employer,  therefore,  is  to  a  large  degree  himself  re- 
sponsible for  the  power  of  the  labor  unions,  the  exist- 
ence of  which  many  employers  deplore. 

The  unions  have  made  the  weaknesses  of  the  old 
system  of  management  their  strength.  By  paying 
men  a  group  wage,  their  group  consciousness  is 
awakened  and  their  solidarity  increased.  When 
changes  in  the  method  of  payment  are  proposed, 
unions  usually  resent  them  for  in  community  of  inter- 
est lies  the  strength  of  their  organization. 

The  fact  that  the  good  worker  receives  the  same 
wage  as  the  poor  worker  means  that  in  the  actual 
wage  some  kind  of  compromise  is  struck  in  which  the 
good  man  receives  less  than  he  is  worth  and  many 
poor  men  receive  much  more.  The  good  worker  re- 
sents this  situation  but  sees  no  way  out,  for  he  feels 
that  only  by  solidarity  can  he  hope  to  maintain  his 
position.    The  poor  worker  is  constitutionally  a  mal- 


B  U  S  I  N  ESS     ORGANIZATION 155 

content.  Most  poor  workers  are;  they  are  usually 
unwilling  to  admit  their  own  shortcomings  and  seek 
to  shift  the  blame  upon  others.  We  all  know  this 
type  of  person.  When  skating,  playing  tennis,  or 
running  it  is  never  he  that  loses  the  match.  His 
skate  was  out  of  order  or  the  balls  were  old,  and  some- 
one ought  to  fix  up  that  track.  The  good  sportsman 
plods  along  without  complaining  and  wins  the  race. 

The  employer  should  not  be  satisfied  with  the  day 
wage,  not  only  because  it  does  not  supply  the  right 
kind  of  motive  for  work,  but  because  he  bears  all  the 
losses  that  result  from  disloyalty  and  laziness.  The 
fact  that  he  receives  all  the  benefits  of  conscientious 
effort  does  not  quite  offset  the  disadvantage  that  he 
is  never  certain  what  a  job  is  going  to  cost. 

He  Buys  Output.  The  Piece  Rate,  The  principal 
defects  of  the  day  wage  are  that  it  does  not  give  an 
incentive  for  work  and  that  the  interests  of  the  work- 
man and  employer  are  antagonistic.  Many  em- 
ployers have  hoped  to  remedy  these  defects  by  paying 
not  according  to  time  spent  but  according  to  the 
number  of  units  of  output.  In  other  words,  they  pay 
a  piece  rate.  They  pay  so  much  for  every  piece  pro- 
duced whereby  the  total  earnings  of  a  workman  de- 
pend entirely  upon  his  productivity. 

This  method  of  payment  has  many  advantages. 
The  workman  now  knows  that  his  earnings  depend 
upon  himself;  he  will  work  faster  and  with  greater 
interest  'in  his  work.     The  employer  gains  in  two 


156  BUSINESS     ORGANIZATION 

ways.  He  gains  first  of  all  in  that  he  knows  what 
the  wage  cost  will  be  of  each  piece  produced.  In  the 
second  place,  he  gains  because  the  greater  the 
amount  produced  in  his  factory  the  less  each  unit 
of  output  bears  of  the  total  overhead  or  general  ex- 
pense of  the  plant. 

Both  employer  and  employee  have  an  Interest, 
therefore,  in  large  output.  In  so  far  their  interests 
are  parallel.  It  is  not  necessary  to  have  a  pace- 
setter or  driver  in  such  a  factory,  and  this  helps  to 
create  a  better  feeling  between  employer  and  em- 
ployee. In  place  of  the  drivers  it  is  necessary,  how- 
ever, to  appoint  inspectors  to  scrutinize  carefully  all 
work  produced,  for  workmen  when  paid  by  the  piece 
may  increase  quantity  at  the  expense  of  quality. 

There  are  objections,  however.  The  workman  is 
not  assured  a  minimum  day  wage.  He  is,  therefore, 
somewhat  in  uncertainty  in  regard  to  his  earnings, 
though  this  is  no  very  grave  objection.  There  are 
other  reasons  why  workmen  generally  oppose  this 
method  of  payment.  One  of  the  most  commonly 
found  objections  is  the  one  that  it  breaks  down  the 
union.  This  cannot  be  denied.  The  solidarity  of  the 
group  is  endangered  as  soon  as  the  group  wage  is 
done  away  with.  Men  become  individuals,  dealing 
with  their  employers  and  receiving  a  wage  set  by 
their  own  output  with  little  reference  to  others  per- 
forming  the    same   work.      Nevertheless    powerful 


BUSINESS     ORGANIZATION  I57 

unions  are  found  in  trades  in  which  a  piece  rate  is 
the  prevaihng  method  of  payment. 

The  most  serious  objection  is  based  on  the  fear  that 
the  rate  will  be  cut.  This  fear  is  not  unfounded. 
Many  shortsighted  managers  have  used  the  piece  rate 
plan  merely  as  a  means  of  finding  out  how  much  a 
workman  could  produce  only  to  cut  the  piece  rate 
enough  so  that  the  total  rate  received  for  the  maxi- 
mum output  was  no  more  than  the  original  day  wage. 
Through  such  unfair  practices,  the  workmen's  suspi- 
cions of  the  motives  of  all  firms  installing  a  piece  rate 
have  been  aroused  and  the  benefits  of  piece  rates  have 
been  much  lessened.  The  fear  of  the  rate  cut  often 
induces  workmen  to  continue  their  policy  of  soldier- 
ing even  under  the  piece  rate  plan,  so  that  the  em- 
ployer may  not  discover  their  maximum  capacity. 

Need  for  Accurate  Information.  Not  all  employers 
who  have  cut  rates  have  done  so  as  a  part  of  a  definite 
plan  of  deceit.  They  feel  justified  in  so  doing  be- 
cause the  difference  between  the  piece  rate  wages  and 
the  old  day  wage  showed  them  how  grossly  negligent 
and  lazy  their  working  men  had  been  in  the  past.  A 
piece  rate  based  upon  the  output  under  day  wages 
often  leads  to  a  wage  three  or  four  times  the  original 
day  wage.  Nothing  will  destroy  the  confidence  of 
the  workman  in  the  management  so  completely  as  a 
cut  in  the  piece  rate.  This  must  at  all  cost  be  avoided. 
The  only  way  to  arrive  at  a  piece  rate  which  need 
not  be  cut  is  to  determine  the  normal  output  of 


158  BUSINESS     ORGANIZATION 

workmen  before  setting  the  rate.  In  other  words,  a 
piece  rate  cannot  be  set  by  guess  work  or  by  a  ma- 
jority vote,  but  must  be  set  after  a  careful  study  of 
the  work.  The  work  should  be  analyzed;  the  best 
way  should  be  discovered;  the  tools  and  methods 
standardized;  and  the  time  which  the  work  should 
take  determined.  The  piece  rate  may  now  be  set  with- 
out fear  that  a  cut  may  later  be  thought  necessary. 

Co-operation  between  Employers  and  Employees. 
The  question  is  often  raised  whether  employees 
should  have  a  voice  in  the  setting  of  the  piece  rate. 
As  long  as  the  actual  working  time  required  for  work 
is  not  accurately  known,  one  man's  guess  is  as  good 
as  another's.  Once  the  time  required  has  been  de- 
termined by  an  elaborate  process  there  is  little  room 
left  for  argument.  The  only  question  left  for  argu- 
ment is  whether  the  day  wage,  made  possible  by  a 
normal  amount  of  work  according  to  the  standard- 
ized methods  and  the  piece  rate  set,  is  sufficient. 
Once  the  normal  day  wage  is  agreed  upon  the  piece 
rate  is  then  quickly  determined,  but  unless  both  the 
normal  daily  earnings  and  the  normal  amount  of 
work  are  determined  in  co-operation  with  the  workers 
it  will  be  difficult  to  convince  them  that  everything 
was  arrived  at  fairly.  Co-operation  in  the  determina- 
tion of  time,  task,  and  rate  holds  out  the  greatest 
promise  for  industrial  peace. 

It  is  no  easy  matter  to  determine  the  time  required 
for  a  certain  piece  of  work  with  accuracy  and  fairness. 


BUSINESS     ORGANIZATION  I59 

It  must  be  plain  that  the  output  which  was  normal 
under  the  old  day  wage  forms  no  standard,  for  the 
time  required  for  each  unit  of  output  contains  a 
large  amount  of  time  spent  in  "soldiering."  How  to 
eliminate  this  dead  time  is  the  problem  which  now 
confronts  us.  In  most  factories  the  managers  are 
satisfied  if  they  secure  the  co-operation  of  a  few  of 
the  higher  grade  workmen.  After  determining  their 
average  time  the  piece  rate  is  set  with  reference  to  it. 
Usually  the  rate  is  set  a  little  higher  so  that  it  may 
not  work  a  hardship  upon  the  less  able  workmen. 
Such  a  method  is  not  absolutely  accurate  but  is 
accurate  enough  for  most  purposes. 

He  Buys  Output  and  Time.  The  Task.  Some 
hold  that  the  employer  buys  both  time  and  output. 
Maximum  efficiency  cannot  be  attained  unless  every 
element  in  the  factory  is  keyed  up  to  a  high  pitch  of 
work.  The  employer  is  interested  in  large  output 
because  it  cuts  his  overhead  charge  per  unit  of  output. 
In  terms  of  labor  this  means  that  he  can  only  afford 
to  employ  men  who  possess  a  certain  amount  of 
productivity.  He  must  therefore  make  it  worth 
while  for  all  men  to  reach  a  normal  amount  of 
output,  or  task. 

The  best  method  of  payment,  so  they  claim,  is  to 
pay  a  workman  a  certain  rate  per  hour;  this  assures 
him  a  steady  income.  This  rate  is  made  low  for  all 
who  fall  below  the  task  and  high  for  all  who  reach 
the  task  and  who  exceed  it.    A  similar  result  may  be 


l60  BUSINESS     ORGANIZATION 

obtained  by  paying  two  different  piece  rates,  one 
the  lower,  to  men  falling  below  the  task,  and  another, 
a  higher  rate,  to  all  who  attain  or  exceed  the  task. 

In  each  case  the  rate  would  then  be  arranged  in 
such  a  way  that  any  workman  not  reaching  the  task 
would  make  only  a  very  moderate  wage  while  those 
reaching  the  standard  of  efficiency  set  are  rewarded 
quite  liberally. 

To  give  an  example.  Suppose  that  a  piece  of  work 
should  take  four  hours  to  perform,  and  that  the 
rate  per  hour  for  a  workman  who  reaches  this  normal 
rate  of  output  is  fifty  cents  per  hour ;  then  the  slower 
worker  may  not  receive  more  than  twenty-five  or 
thirty  cents.  In  fact  the  hour  wage  may  grow 
smaller  and  smaller  the  less  efficient  he  is.  This 
seems  not  unfair  in  principle.  From  the  employer's 
point  of  view  it  is  logical,  for  a  slow  worker  means 
an  inefficient  use  of  machinery,  tools,  and  working 
space,  and  an  accumulation  of  goods  in  process  and 
consequently  an  increase  in  the  overhead  burden. 

A  different  problem  is  introduced  when  the  rate  of 
pay  above  this  normal  task  is  set.  Suppose  that  the 
workman  succeeds  in  finishing  two  pieces  in  the  time 
set  for  one.  What  ought  the  hour  rate  to  be? 
The  workman  may  well  argue,  "The  normal  cost  to 
the  factory  which  is  considered  fair,  is  fifty  cents 
an  hour  for  a  four-hour  job,  or  two  dollars  for  the 
job.  In  case  I,  through  my  greater  energy  and 
efficiency,  succeed  in  making  two  pieces  in  the  same 


BUSINESS     ORGANIZATION  l6l 

time,  I  should  receive  two  times  two  dollars,  or  four 
dollars,  for  these  four  hours.  The  cost  of  each  piece 
to  the  factory  would  still  be  two  dollars  and  my 
employer  would  receive  the  benefit  of  an  additional 
saving  in  overhead." 

This  indeed  sounds  logical,  and  corresponds  to  the 
view  taken  by  some  managers.  Others,  however, 
remark  against  this.  "This  reasoning  holds  good  only 
if  we  agree  that  you  are  selling  me  your  output  when 
I  hire  you.  Now  I  believe  that  output  is  something 
you  cannot  very  well  sell,  for  it  is  something  in 
which  I  work  with  you.  I  supply  the  machines,  the 
place  to  work,  and  the  raw  material.  I  carry  on 
laboratory  experiments  to  discover  the  most  efficient 
methods,  and  I  take  the  trouble  to  teach  you.  I 
don't  deny  that  you  are  worth  more  to  me  when  you 
do  good  work  than  when  you  loaf.  That  is  the  reason 
for  my  paying  you  higher  wages  as  your  efficiency 
increases,  but  I  am  not  going  to  give  you  all  the 
saving  that  results  from  your  better  work.  That  is 
what  you  ask  when  you  say:  Tay  me  two  dollars  a 
piece  after  I  reach  the  task.* 

"I  also  admit  that  you  must  be  paid  something 
extra  for  cutting  the  time  set.  I  contend  that  we 
should  divide  this  saving  between  us.  You  ask  why? 
Because  I  am  not  buying  your  output,  which,  as  I 
explained,  is  not  yours;  I  am  buying  your  time. 
You  have  come  to  work  for  me  a  full  working  day. 
If  you  can  finish  two  pieces  in  a  half  day  while  some 


l62  BUSINESS     ORGANIZATION 

Other  man  needs  a  whole  day  to  do  as  much,  that 
does  not  mean  that  the  rest  of  the  day  is  all  yours. 
You  are  still  working  on  my  time  and  benefiting  by 
my  co-operation." 

Many  wage  schemes  have  been  devised  to  bring 
about  a  method  of  wage  payment  which  would 
satisfy  this  latter  argument.  One  of  these  methods 
is  in  short  as  follows :  A  day  wage  is  guaranteed  to 
every  workman.  Those  who  attain  a  moderate  task 
receive  a  part,  say  one  half  of  the  wages  of  the  time 
saved.  For  instance,  a  workman  earns  thirty  cents 
an  hour,  and  is  asked  to  do  a  task  normally  requiring 
eight  hours.  He  performs  this  task  in  six  hours. 
His  earnings  would  then  be: 

6  X  0.30  =  $  1.80  which  is  his  pay  for  the  time 
worked,  plus  yi  x  0.60  =  0.30  which  is  his  share  in 
the  saving  in  the  cost  of  labor,  or  a  total  of  $2.10. 
This  he  earns  in  six  hours  which  means  that  his  hour 
rate  has  increased  from  thirty  cents  to  thirty-five 
cents.  If  eight  hours  constitute  a  day,  his  day  wage 
would  be  increased  from  $2.40  to  $2.80.  This 
method  of  payment  was  proposed  by  F.  A.  Halsey, 
a  manufacturer  of  Sherbrooke,  Canada,  and  is 
spoken  of  as  the  Halsey  plan. 

There  are  many  other  similar  wage  plans  such  as 
the  Rowan  premium  plan,  the  Taylor  differential 
piece  rate  system,  and  the  Emerson  efficiency  wage. 
These  different  methods  of  payment  all  have  one 
thing  in  common,  i.  e.,  they  set  a  task,  and  the  wages 


BUSINESS     ORGANIZATION  163 

received  by  the  workmen  are  determined  with  refer- 
ence to  the  task.   They  differ  mainly  in  three  respects. 

1 .  The  method  according  to  which  the  task  is  determined. 

2.  The  degree  to  which  the  workman  is  allowed  to  share 

in  the  savings. 

3.  The  degree  to  which  the  workman  is  penalized  for  not 

attaining  the  task. 

Some  of  these  wage  payment  plans,  such  as  the 
Taylor  differential  piece  rate  and  the  Emerson 
efficiency  wage,  give  the  entire  savings  to  the  worker. 

Other  wage  systems  give  a  portion  of  the  sav- 
ings to  the  management. 

Setting  a  Task,  The  setting  of  the  task  now  be- 
comes a  matter  of  great  importance.  It  is  quite 
important  under  a  piece  rate  plan,  but  it  becomes 
even  more  so  when  all  those  not  reaching  the  task  are 
paid  but  meager  wages  and  a  substantial  increase  is 
allowed  as  soon  as  the  task  is  reached.  In  fairness 
to  all  concerned,  both  employees  and  employers,  a 
task  should  be  set  accurately  and  fairly.  A  scien- 
tifically determined  task  is  therefore  the  first  requisite 
for  the  satisfactory  operation  of  any  of  these  more 
elaborate  wage  systems. 

The  Taylor  system  of  payment  places  more  em- 
phasis than  any  of  the  other  wage  systems  upon  an 
accurately  set  task  and  upon  the  attainment  of  it 
by  the  workmen.  The  other  wage  systems  allow  a 
greater  degree  of  elasticity.    The  Taylor  system  is 


l64  BUSINESS     ORGANIZATION 

therefore  workable  only  where  a  complete  system  of 
scientific  management  is  installed  and  a  task  is  set 
after  careful  time  studies'of  the  standard  performance 
of  well-trained  workmen.  When  making  such  time 
studies,  assistants  with  stop  watches  time  accurately 
every  separate  operation  as  performed  by  the 
workmen  who  are  being  studied. 

A  time  study  of  the  various  elements  which 
together  constitute  a  complete  operation  is  called  an 
elementary  time  study.  From  the  data  obtained  by 
this  study  the  task  is  calculated.  Studying  each 
element  separately  instead  of  timing  the  working 
period  as  a  whole  leads  to  better  results.  First, 
because  any  attempt  to  stretch  the  time  in  any  part 
of  the  work  is  more  easily  detected,  and  second 
because  this  information  may  now  be  filed  away  and 
may  be  used  later  to  calculate  the  time  for  other 
pieces  of  work  which,  though  different,  require  many 
of  the  same  operations. 

Where  no  attempt  is  made  to  maintain  scientific 
management,  tasks  are  often  determined  according 
to  the  average  past  performance  of  the  better  grade 
of  workers.  This  is  not  accurate  but  is  quite  work- 
able provided  the  difference  between  the  eamijtigs 
of  those  who  achieve  and  those  who  do  not  achieve 
the  task  is  not  made  too  large  and  too  abruptly. 

Summary  of  Wage  Payments.  To  summarize  the 
whole  matter  in  a  few  words.  There  are  various 
ways  of  paying  workmen:  the  day  wage  which  is 


BUSINESS     ORGANIZATION  165 

based  on  time;  the  piece  rate  wage  based  on  output; 
and  a  number  of  payment  plans  which  are  built 
around  a  more  or  less  carefully  set  task  and  which 
in  theory  at  least,  recognize  both  the  time  and  the 
output  as  a  basis  for  payment. 

In  general  that  method  of  payment  is  most  desir- 
able which  calls  forth  the  greatest  degree  of  co-opera- 
tion between  the  workers  and  the  management.  It 
cannot  be  said  that  any  one  method  of  payment  is 
the  best,  for  circumstances,  the  type  of  management, 
the  type  of  workmen,  and  the  character  of  the 
industry  will  determine  which  method  is  best 
adapted. 

The  Demand  for  Standardized  Conditions.  In  the 
preceding  chapter  we  mentioned  the  need  for 
standardization  of  working  conditions.  At  that  time 
it  was  probably  not  clear  why  the  standardization 
was  of  such  great  moment.  This  ought  now  to  be 
clear.  The  workman  who  is  asked  to  work  under  a 
method  of  wage  payment  which  calculates  his  earn- 
ings according  to  output,  especially  if  a  task  is 
introduced,  has  a  very  vital  interest  in  the  conditions 
that  surround  him.    He  reasons  somewhat  like  this: 

"That  plan  appeals  to  me  for  it  makes  it  worth  my 
while  to  do  the  best  I  can,  and  the  better  I  do,  the 
more  I  eaim.  That  strikes  me  as  fair.  There  is  one 
thing  I  want  to  make  sure  of,  though.  It  would  not 
be  fair  to  have  me  suffer  a  loss  in  wages  because  your 
machines  are  out  of  order,  or  because  you  do  not 


l66  BUSINESS     ORGANIZATION 

have  the  raw  material  ready  in  the  proper  place  and 
at  the  time  when  I  need  it.  How  can  I  reach  my 
task,  how  can  I  increase  my  output,  when  I  have  to 
run  all  over  creation  to  find  my  tools?  In  all  fairness 
to  me  the  management  must  see  to  it  that  I  have  the 
right  kind  of  raw  material  at  the  right  time,  and  that 
all  these  things  are  in  good  condition/' 

This  is  the  thought  back  of  the  demand  for 
standardized  working  conditions.  This  demand  is 
very  reasonable  and  fair.  The  system  of  manage- 
ment which  we  have  called  scientific  management  is 
based  on  the  recognition  of  the  justice  of  this  de- 
mand.   In  short  it  means : 

1.  Discovering  the  right  standards  with  scientific  accu- 

racy. 

2.  Maintaining  the  right  standards. 

3.  Training  the  workers  to  reach  a  reasonable  task. 

4.  Placing  all  management  functions  in  the  hands  of  the 

management. 

5.  Rewarding  the  workers  according  to  whether  they 

reach  the  task  set  or  fall  short  of  it. 

The  need  for  the  functional  foremen  discussed 
in  chapter  VII,  such  as  the  repair  boss,  the  machine 
speed  boss,  and  the  instruction  card  clerk  is  now 
apparent. 

Tke  Group  Bonus,  Not  all  industries  are  of  such  a 
character  that  it  is  possible  to  determine  the  output 
of  each  individual.  Take  for  example  a  soap  factory. 
A  large  vat  must  be  kept  boiling  for  several  days, 


BUSINESS     ORGANIZ  A  T  I  O  N  167 

and  different  shifts  of  men  tend  the  fires  and  look 
after  many  small  jobs  about  the  vat.  How  could  the 
output  of  one  man  be  determined?  Again,  take  a 
firm  of  house  painters  which  sends  its  men  out  to 
paint  the  interiors  and  exteriors  of  houses.  How 
much  and  how  well  does  each  man  paint?  This  can 
not  be  answered  easily,  if  at  all.  Again  in  an  auto- 
mobile factory  some  fifty  men  may  all  be  engaged  in 
the  assembling  of  autos,  but  who  can  say  what  each 
individual  contributes  to  the  total  amount? 

In  such  factories  a  f^roup  bonus  is  sometimes  paid, 
or  a  group  piece  rate.  Every  workman  in  the  group  is 
then  vitally  interested  in  the  output  of  the  group.  In 
many  factories  this  method  has  worked  out  very 
satisfactorily  and  has  resulted  in  a  keen  sense  of 
co-operation  between  the  workmen. 

Profit  Sharing.  All  the  wage  payment  schemes 
discussed  so  far  are  based  on  the  thought  that  the 
employer  hires  the  workmen  to  do  a  certain  amount 
of  work.  The  amount  paid  in  wages  rests  upon  the 
value  of  the  work  to  the  employer  calculated  with 
varying  degrees  of  accuracy.  The  wage  is  an  element 
in  the  cost  of  production.  It  is  often  desirable 
to  give  the  workmen  an  interest  in  the  success  of 
the  business  as  a  whole.  They  are,  therefore,  not 
only  paid  a  wage,  as  in  any  other  business  enter- 
prise, but  in  addition  receive  a  share  in  the  profits  of 
the  business.  They  appear  twice  on  the  books  of  the 
firm,  once  as  an  element  in  cost  and  a  second  time 


I68  BUSINESS     ORGANIZATION 

as  a  participant  in  the  distribution  of  the  income. 
This  is  called  profit  sharing. 

It  may  be  said  that  a  working  man  has  no  right 
to  a  share  in  the  profits  since  these  were  secured  not 
through  his  work  alone,  but  through  his  work  com- 
bined with  that  of  a  large  number  of  others;  that 
is,  clerks  and  executives  working  in  the  offices  and 
selling  the  goods  to  the  customers.  But  this  argu- 
ment does  not  hold  very  well  since  this  is  not  the 
question  involved.  The  question  is  how  to  give  the 
workmen  a  vital  interest  in  the  concern  as  a  whole, 
and  this,  is  frequently  accomplished  by  profit  sharing 
better  than  by  any  other  plan. 

In  the  soap  factory  above  mentioned  and  also  in 
the  painter's  firm,  individual  efficiency  cannot  be 
easily  determined,  and  it  is  difficult  to  supervise  the 
workers.  In  such  a  case  profit  sharing  may  prove  a 
very  excellent  way  to  stimulate  in  the  workmen  an 
interest  in  the  business.  They  are  not  so  likely  to 
loaf,  to  waste  material,  to  turn  out  bad  work  when 
they  realize  that  such  actions  result  in  lessened 
profits,  which  means  a  lower  income  to  them. 

That  the  amount  which  they  are  to  receive  as  their 
share  in  the  profits  cannot  be  calculated  except  once 
a  year  or  once  every  six  months,  and  that,  because 
of  this  long  period  the  workingmen  may  fail  to 
realize  the  relation  between  their  faithfulness  and 
the  share  they  are  to  receive,  must  always  be  ad- 
mitted.   But  on  the  other  hand  a  profit  sharing  plan 


B  U  S  I  N  E  S  S     ORGANIZATION 1 69 

frequently  results  in  inducing  men  to  continue  their 
connections  with  a  firm  longer,  because  they  do  not 
want  to  sacrifice  their  share  in  the  profits  they  have 
helped  to  earn,  by  leaving  the  employ  of  the  concern. 
This  means  that  the  firm  secures  a  stable  and  faithful 
labor  force. 

Many  such  profit  sharing  plans  are  in  operation, 
both  in  this  country  and  abroad.  Very  often  the 
share  in  the  profits  is  not  paid  out  in  cash,  but  is 
used  to  buy  shares  of  the  company,  thereby  making 
the  workers  part  owners  of  the  undertaking.  Among 
the  many  well-known  examples  are  the  Maison  de 
Claire  in  Paris  which  originated  profit  sharing  in 
1842;  the  Bon  Marche,  also  in  Paris,  almost  entirely 
owned  by  its  employees;  the  Dennison  Manufactur- 
ing Company  of  Boston ;  and  The  Clipper  Belt  Lacer 
Company  of  Grand  Rapids,  which  inaugurated  a 
profit  sharing  plan  in  1903. 

It  must  be  clearly  understood  that  profit  sharing 
may  very  well  go  hand  in  hand  with  any  of  the 
systems  of  wage  payment  above  discussed. 

The  Wages  of  Store  and  Office  Workers.  The  work  of 
office  employees  and  store  sales  people  is  less  readily 
standardized  than  the  work  of  a  factory  employee. 
Girls  taking  dictation  may  differ  greatly  in  their 
output  merely  because  one  dictator  is  more  speedy 
and  makes  less  mistakes  than  another.  The  intro- 
duction  of  office   machinery   has   aided   much   in 


170  BUSINESS     ORGANIZATION 

standardizing  the  work  of  the  office.  The  dictagraph, 
for  example,  places  all  typists  on  more  nearly  the 
same  basis  and  makes  frequent  waits  and  inter- 
ruptions less  necessary. 

The  result  of  this  increasing  standardization  is  a 
growing  tendency  to  pay  office  help  according  to 
output.  This  principle  has  in  many  offices  been 
applied  to  the  typists.  Careful  records  are  kept  of  the 
amount  of  work  done  by  each  in  terms  of  lines  of  type- 
written material  and  of  the  mistakes  made. 

It  would  never  be  quite  fair  to  pay  each  girl 
strictly  according  to  the  result  of  these  records. 
Office  work  can  never  be  so  neatly  standardized. 
Some  firms,  for  example  the  Burroughs  Adding 
Machine  Company,  classify  the  typists  according  to 
groups,  each  receiving  a  different  weekly  wage.  A 
girl  remains  in  any  group  as  long  as  her  work  does  not 
on  the  average  fall  below  60  per  cent  of  the  amount 
of  work  set  for  the  group.  In  case  she  does  more 
than  60  per  cent  she  receives  a  bonus.  Should  she 
reach  80  per  cent  of  the  task  for  four  weeks,  then  she 
is  placed  in  a  group  with  a  higher  task  and  she  re- 
ceives a  higher  weekly-  wage.  The  method  is 
adapted  to  office  workers  because  the  groups  very 
gradually  increase  their  tasks,  and  within  each  group 
a  girl  may  vary  as  much  as  20  per  cent  of  the  quota. 

Perfect  standardization  or  task  setting  is  not 
feasible  in  a  retail  store.  Other  methods  to  give  the 
employees  an  interest  in  their  own  efficiency  must 


BUSINESS     ORGANIZATION  I7I 

therefore  be  devised.  In  some  retail  stores  sales 
people  are  paid  a  certain  per  cent  of  their  sales.  In 
other  stores  they  are  paid  a  straight  weekly  wage, 
but  a  record  is  kept  of  their  sales,  and  when  it  is 
found  that  their  wages  are  larger  than  a  reasonable 
percentage  of  their  sales,  they  are  discharged  or 
transferred  to  some  other  department. 

Relation  of  Workman  to  Employer,  Finally  it 
may  be  pointed  out  that  more  and  more  it  is  being 
realized  that  no  really  permanently  satisfactory 
method  of  payment  can  be  devised  unless  the  em- 
ployees are  in  some  way  allowed  a  voice  in  setting 
the  rate,  and  are  allowed  to  share  in  the  management 
of  at  least  that  part  of  the  enterprise  where  they 
perform  their  work. 

Where  a  task  is  set  they  should  know  the  processes 
by  which  the  task  was  determined.  Where  profit 
sharing  is  introduced  it  should  be  real  profit  sharing, 
not  a  gift  blindly  accepted,  but  a  definite  percentage 
of  profits  fixed  in  advance.  Properly  appointed 
representatives  of  the  workmen  should  have  access  to 
the  books,  and  a  definite  policy  of  income  on  a  reason- 
able investment  should  be  agreed  upon.  In  short, 
both  sides  should  place  their  cards  on  the  table. 

Many  factories  are  endeavoring  to  give  their 
workmen  a  genuine  voice  in  the  matter.**  of  pay  and 
working  conditions  by  the  establishment  of  commit- 
tees of  which  executives  and  representatives  of  the 
workmen  are  members.     This  is  a  hopeful  sign  that 


172  BUSINESS     ORGANIZATION 

the  new  industrial  day  is  breaking,  in  which  capital 
and  labor  will  be  partners  in  fact  and  in  spirit,  and 
not  only  in  name.  In  such  reforms  lies  the  hope  of  our 
industrial  civilization,  for  in  the  words  of  President 
Wilson  in  his  address  of  May  30,  1919: 

'We  cannot  go  any  further  in  our  present  direction; 
we  have  already  gone  too  far.  We  cannot  live  our 
right  life  as  a  nation  or  achieve  our  proper  success 
as  an  industrial  community  if  capital  and  labor  are 
to  continue  to  distrust  one  another  and  to  contrive 
how  they  can  get  the  better  of  one  another." 

Summary,  The  workman  may  be  looked  upon 
from  two  angles.  He  may  be  considered  as  selling 
his  ability  and  strength  to  the  concern.  Or  he  may 
be  looked  upon  as  a  partner.  The  first  concept  is 
best  illustrated  in  the  day  wage;  the  second  finds  its 
best  expression  in  profit  sharing.  Between  these  two 
extremes  there  are  a  number  of  other  possibilities 
which  recognize  both  principles.  The  tendency  in 
business  is  more  and  more  to  pay  men  according  to 
their  ability  and  to  give  them  an  increasingly  impor- 
tant share  in  the  control  of  the  concern. 

REFERENCES 

The  same  as  the  preceding  chapter.  Additional  reference : 
J.  W.  Schulze.     The  American  Office.     Key  Publishing 
Company. 


BUSINESS     ORGANIZATION  I73 

QUESTIONS  FOR  FURTHER  STUDY 

1.  Draw  charts  showing: 

(a)  The  cost  per  piece  under  the  day  wage  with 

varying  output 

(b)  The  cost  per  piece  under  a  piece  rate  with 

varying  output 
(cy  The  hour  rate  of  the  workmen  in  each  case 
Reference:  Jones.    Chapter  XIII. 

2.  What  are  the  principles  of  task  work? 
References:   Gantt.    Chapter  III. 

Schulze.    Chapter  VIII. 

Parsons.    Chapters  VII,  VIII,  IX.  ^ 

3.  What  is  scientific  management? 
References:  Jones.    Chapter  VII. 

Gantt.    Chapter  III. 
Duncan.    Chapter  XIII. 

4.  What  is  a  fair  day's  work? 
References:  Jones.    Chapter  XII. 

Gantt.    Chapter  IV. 

TEST  QUESTIONS 

1.  What  are  the  advantages  and  disadvantages  of  a 
day  wage? 

2.  If  you  had  the  choice,  under  which  method  of  wage 
payment  would  you  prefer  to  work? 

3.  Why  do  workingmen  often  object  to  the  piece  wage? 

4.  What    argument    lies    back    of    the    demand    for 
standardized  working  conditions? 

5.  What  is  meant  by  a  task?    And  how  may  a  system 
of  wages  be  built  around  the  task? 

6.  What  is  a  group  bonus? 

7.  What  type  of  undertakings  are  particularly  adapted 
to  a  profit  sharing  plan? 


174  BUSINESS     ORGANIZATION 


CHAPTER   IX 

THE  SERVICE  DEPARTMENT 

What  Is  Indtided  in  the  Service  Department?  In 
many  factories  and  stores  several  functions  are 
grouped  under  the  name  service  department.  The 
following  offices  are  usually  included : 

1.  The  employment  office 

2.  The  educational  office 

3.  The  health  office 

4.  The  welfare  office 

The  general  term  service  department  is  coming 
into  use  quite  generally  for  it  not  only  describes  the 
purpose  of  the  department  accurately,  but  it  is  to 
be  preferred  to  welfare  which  always  carries  a 
suggestion  of  charity. 

The  Employment  Office.  The  employment  office  is 
in  charge  of  the  hiring  and  discharging  of  workmen. 
Such  an  office  is  by  no  means  found  in  all  business 
houses  but  there  is  a  growing  realization  of  the 
benefits  which  result  from  its  establishment. 

In  most  business  concerns  the  hiring  and  firing  is 
done  by  the  foreman  or,  in  the  office,  by  some 
departmental  head.  This  is  very  inefficient.  One  of 
the  fundamental  requirements  in  an  efficient  organ- 


BUSINESS     ORGANIZATION  175 

ization  is  the  selection  of  the  right  kind  of  workers. 
The  average  business  executive  or  foreman  has 
neither  the  time  nor  the  knowledge  which  are 
required  to  make  a  careful  selection  from  among  the 
many  applicants.  Everything  else  in  a  factory  or 
store  is  usually  in  the  hands  of  specialists.  The  shoe 
buyer  would  not  undertake  to  buy  the  millinery  any 
more  than  in  a  factory  the  expert  salesman  would 
undertake  to  select  the  lathes  for  the  shop.  The 
employment  of  labor  in  many  concerns  is  still  looked 
upon  as  everybody's  work  and  with  disastrous  results. 

Labor  Turnover.  In  terms  of  dollars  and  cents  the 
absence  of  a  centralized  employment  department 
means  a  loss  to  the  firm.  During  the  war  many 
studies  were  made  of  employment  conditions  in 
industries  in  this  country  with  surprising  results. 

It  was  found  that  most  plants  had  practically  the 
same  experience.  Workmen  came  and  left  again 
after  a  short  period  of  employment.  In  order  to 
supply  the  required  number  of  workmen  to  any 
plant  it  was  necessary  to  hire  many  times  that 
number.  The  West  Pennsylvania  lines  were  com- 
pelled to  take  on  84,000  new  workers  during  an 
eight  months*  period  in  order  to  keep  2,000  jobs 
supplied  with  men.  These  figures  are  but  typical 
of  a  condition  which  even  in  normal  times  prevails 
in  many  industries. 

The  ratio  of  the  number  of  men  taken  on  during  a 
given  period  to  the  average  number  of  employees 


176  BUSINESS     ORGANIZATION 

actually  employed  constitutes  the  "labor  turnover" 
of  a  concern.    To  give  an  example : 

Suppose  150  men  entered  the  employ  during  the 
week,  and  that  the  number  actually  at  work  durjng 
the  six-day  week  was:  Monday  11 50,  Tuesday  1200, 
Wednesday  11 70,  Thursday  iioo,  Friday  loio, 
Saturday  1000;  then  the  average  number  employed 
during  the  week  is  6630  divided  by  6,  or  1 105. 
One  hundred  and  fifty  additions  a  week  is  52  times 
150,  or  7800  a  year.  To  keep  the  factory  continually 
supplied  with  an  average  of  11 05  men  during  the 
year  requires,  therefore,  7800  new  men  or  705.6% 
of  the  average  working  force.  The  Pennsylvania 
lines  above  quoted  had,  according  to  this  method  of 
calculation,  a  turnover  of  H^x^  or  6300  per  cent. 

Labor  Turnover  an  Expense.  Wherever  a  large 
labor  turnover  is  found,  an  important  cause  of  high 
labor  cost  has  been  discovered.  When  a  new  man 
joins  the  working  force  he  must  not  only  be  trained  to 
do  the  job  for  which  he  was  hired,  but  he  must  adapt 
himself  to  his  new  environment,  become  used  to  the 
location  of  his  machinery  and  tools,  and  must 
become  acquainted  with  the  methods  of  the  shop. 
While  he  is  learning  he  is  not  producing  his  maximum 
output,  and  often  slows  down  the  speed  of  his  own 
and  neighboring  production  centers.  He  demands  a 
larger  share  of  the  foreman's  time  and  frequently 
spoils  raw  material  and  tools.  In  other  words,  it 
costs  the  shop  money  to  train  a  new  man.    Some 


BUSINESS     ORGANIZATION  I77 

shops  estimate  that  it  costs  from  fifty  to  two  hundred 
dollars  to  "break  in"  a  man. 

A  large  percentage  of  labor  turnover  has  also 
undesirable  social  effects.  Quitting  and  looking  for 
another  job  elsewhere  very  soon  becomes  a  habit 
with  men.  They  join  the  army  of  men  who  are 
habitually  underemployed.  From  part-time  em- 
ployment they  gradually  drift  into  the  class  of 
chronically  unemployed.  Many  causes  are  responsi- 
ble for  excessive  labor  turnover: 

1.  Unscientific  hiring. 

2.  Lack  of  supervision  of  employment. 

3.  Absence  of  a  method  of  discovering  and  encouraging 

latent  talent. 

4.  Lack  of   co-operation  between  departments  in   the 

matter  of  employing  men. 

These  various  causes  will  now  be  discussed  in 
detail  and  the  part  which  a  centralized  employment 
office  may  play  in  remedying  these  conditions  will  be 
explained. 

Hiring  Men.  It  is  impossible  to  hire  the  right  man 
for  any  job  or  position  until  the  requirements  of  the 
job  are  accurately  known.  It  makes  a  big  difference 
in  many  jobs  whether  a  man  is  tall  or  short,  and 
whether  he  wears  glasses,  or  has  exceptionally  good 
eyesight.  Joh  analysis,  or  a  careful  study  of  the 
position  to  be  filled,  should  precede  any  attempt  to 
hire  men.  Detailed  job  specifications  should  then  be 
drawn  up. 


178  BUSINESS     ORGANIZATION 

The  advantages  of  such  job  specifications  are  many. 
Once  all  jobs  in  the  factory  are  thus  described  in 
detail,  the  work  of  finding  men  for  these  jobs  is 
much  simplified.  All  guesswork  is  eliminated.  The 
preparation  of  such  specifications  forces  the  execu- 
tives to  analyze  the  job,  and  to  study  its  requirements. 
This  leads  to  a  better  appreciation  of  the  working- 
man's  problems  and  may  often  lead  to  the  discovery 
of  disagreeable  features  which  may  be  eliminated  or 
may  bring  out  the  justice  of  paying  a  higher  wage. 
Without  such  detailed  knowledge  of  the  work  done 
by  each  workman,  a  truly  fair  adjustment  of  wages 
and  salaries  is  not  possible.  With  this  knowledge  it 
is  easy  to  determine  whether  men  may  be  shifted 
from  one  job  to  another,  and  whether  women,  or  less 
highly  skilled,  and  therefore  less  expensive  labor, 
may  be  substituted.  One  large  manufacturing 
company  uses  the  following  card  on  which  the 
foreman  or  manager  is  required  to  give  the  neces- 
sary information  to  the  employment  ofiice. 


BUSINESS     ORGANIZATION  179 

STANDARD  JOB  SPECIFICATION 

Copy  for 

Dept mw Class la Job  Name.. . 

All-round  repair  machinist 

Description  of  Job All-round  machinist  making 

and  assembling  repair  parts 

Nature  of  Work  and  Working  Conditions: 

Heavy Standing. x.  .Floor Quick. x. .  .Dirty,  .x.  . 

Medium .  x .  .  Sitting Bench Slow.  ; . . . .  Greasy.  . . . 

Bench  Mach Rough ....  Wet 

Light Walking Floor  Mach.  .x. .  .Close. x.  .  .Clean 

Continuously   Repeated    Operation Or   Variety 

of  Jobs 

Make  of  Machine 

Length  of  Time  Required  to  Learn  Job 6  months .  . . 

Rates:    DW  or  PW dw.  . .  .Starting  Rate.  .  .Average 

earnings  on  PW 

How  Soon  Put  on  Piece  Work 

Requirements :  Schooling  desired 

Necessary  to  Read  and  Write  English x 

Read  Blueprints x 

Tools  Required Full  set  machinist  tools 

Preferred  Age 35-45 Height Weight 

over  140 Nationality Previous   Training   or 

Experience   Desired Experience  or  repair  work  on 

similar  class  of  machinery 

Remarks 


Dept.  Foreman Employ.    Dept, 

Supt Date 


l8o  BUSINESS     ORGANIZATIOJN 

With  such  information  at  hand  the  employment 
office  can  select  men  intelligently  and  may  readily 
shift  them  from  one  job  to  another,  frequently 
filling  new  jobs  that  come  open  by  transfer  and 
promotion  rather  than  by  taking  on  new  men. 

Securing  A  pplicants.  The  employment  department 
should  endeavor  to  have  a  sufficient  number  of 
applications  on  file  so  that  openings  that  arise  in  the 
plant  may  be  readily  filled.  This  is  especially 
desirable  where  it  concerns  jobs  requiring  special 
skill  or  training.  At  every  business  establishment 
applications  for  positions  are  constantly  made, 
either  in  person  or  by  letter.  Nevertheless,  it  may  be 
necessary  for  the  employment  office  to  make  an 
active  campaign  for  certain  classes  of  applicants, 
for  the  larger  the  list  to  choose  from  the  more 
successful  the  selection  is  likely  to  be. 

Employment  offices  may  use  any  of  the  following 
channels  to  place  themselves  in  touch  with  possible 
candidates;  by  means  of  advertisements  in  the 
newspapers,  recommendations  from  employees,  the 
schools,  Y.  M.  C.  A.  secretaries,  or  through  public  and 
private  employment  agencies.  The  applicants  who 
present  themselves  at  the  office  or  who  apply  by 
letter  should  be  required  to  fill  out  an  application 
blank.  The  object  of  the  application  blank  is  to 
collect  information  about  all  applicants,  which  will 
allow  the  employment  office  to  determine  the 
fitness  of  the  applicant  for  particular  jobs.     Such 


1 82 


BUSINESS      ORGANIZATION 


blanks  may  be  large  sheets  or  cards;  they  are  filled 
out  for  future  reference  and  become  part  of  the 
permanent  record  of  the  employee.  Such  an  appli- 
cation card  may  have  the  following  form : 

Porm  No.  APMS 


APPLICATION  CARD 

Date 


Name 

Tel.  No. 

Local  Address 

Home  Address 

Age             Weight 

Last  employed  by 

Married-Single 

Nationality 

Where 

Position  applied  for 

Length  of  time 

Rate  Date  Quit 

Years  experience 

Held  position  as 

Also  worked  for 

Position 

Length  of  Time 

Also  worked  for 

Position 

Length  of  Time 

Recommendations 

Can  fill  following  positions 

Remarks 

BUSINESS     ORGANIZATION 


183 


The  back  of  the  card  is  frequently  used  to  accumu- 
late the  record  of  the  employee's  work: 


Name 

Wkm's  No. 

Address 

Tel.  No. 

Date  started 

Dept. 

Position 

Starting  Rate 

Rate  changed  to 

Date 

Dept. 

Rate  chanp:ed  to 

Date 

Dept. 

Rate  changed  to 

Date 

Dept. 

Positions  best  adapted 

In  case  of  accident  notify 

Employed  here  before  dept. 

Rate 

Left  our  employ  date 

Quit 

Laid  off                       Temp,  lay  off 

Discharged 

Character 

Workmanship 

Remarks 

As  will  be  observed  the  application  blank  gives  a 
record  of  work  with  other  firms  and  indicates  other 
positions  for  which  the  applicant  is  equipped. 


184  BUSINESS     ORGANIZATION 

Filling  Vacancies,  As  the  various  departments  of 
the  concern  are  in  need  of  men  they  send  in  their 
requisitions,  and  the  employment  office  will  proceed 
to  fill  the  vacancy.  Where  possible,  such  openings 
are  filled  from  among  the  men  already  employed  by 
the  firm.  This  may  mean  that  someone  is  promoted 
to  a  position  requiring  greater  skill  and  commanding 
better  pay,  or  that  he  is  given  the  opportunity  to 
work  in  a  job  more  in  accordance  with  his  preference 
expressed  when  he  was  hired. 

This  brings  out  two  principles  in  handling  men: 
Find  out  what  they  like  to  do,  and  as  far  as  possible 
give  them  the  opportunity  to  show  what  they  can 
accomplish  in  the  work  of  their  choice.  Men  will  be 
happier  when  doing  work  in  which  they  are  interested 
than  when  kept  at  uncongenial  tasks.  They  will 
also  work  with  better  spirit  in  work  they  do  not  like 
as  long  as  they  know  that  faithfulness  will  be  reward- 
ed by  promotion  to  their  preference  as  soon  as  the 
opening  occurs.    The  two  principles  are: 

1.  Let  each  man  feel  that  he  is  in  line  for  promotion. 

2.  Keep  a  record  of  the  preferences,  and  fill  openings 

wherever  possible  by  transfers  and  promotion  rather 
than  by  new  appointments. 

It  is  also  possible  that  the  surplus  labor  in  one 
department  may  be  placed  to  advantage  in  some 
other  department  which  is  temporarily  rushed.  Such 
methods  make   for  smaller   labor  turnover  and   a 


BUSINESS     ORGANIZATION  185 

more  satisfied  and  stable  working  force.  Is  it  not 
plain  now  that  only  a  centralized  employment 
office  can  handle  the  employment  of  men  efficiently? 

Selecting  the  Workers.  In  case  it  is  necessary  to  go 
outside  for  candidates,  a  careful  selection  must  be 
made  from  among  many  applicants.  It  is  no  simple 
matter  to  select  the  one  most  suited  for  a  particular 
position  from  among  the  large  number  of  applicants. 

Every  executive  likes  to  feel  that  he  has  excep- 
tional ability  in  ''sizing  up"  men.  Many  of  them  do 
possess  a  remarkable  ability  to  form  a  fairly  correct 
judgment  about  a  man's  ability  and  general  person- 
ality from  a  short  interview.  Many,  however,  make 
serious  mistakes  in  misjudging  men.  The  question 
may  be  asked  whether  there  is  a  scientific  way  of 
selecting  men.  The  answer  is  that  rapid  strides  are 
being  made  in  that  direction,  but  that  as  yet  no 
absolute  standards  can  be  set  up. 

Psychological  tests  may  be  given,  and  are  given 
by  many  employment  offices  with  moderate  success. 
The  principle  upon  which  such  mental  tests  are 
based  is  that  there  are  certain  innate  traits  of  the 
mind  which  determine  mental  development  and 
adaptability  to  a  certain  type  of  work.  The  appli- 
cant's mental  processes  may  be  slow  or  quick.  He 
may  respond  quickly  to  impressions  from  without 
or  may  be  very  slow  to  react;  he  may  remember  more 
readily  things  heard  than  things  seen;  he  may  be 
inclined  to  careful  analytical  thought  rather  than  to 


186  BUSINESS     ORGANIZATION 

quick  action.  The  tests  of  the  psychological  labora- 
tory as  used  in  the  personnel  service  of  the  United 
States  Army  and  in  many  private  firms,  make  it 
possible  to  discover  these  fundamental  traits.  Too 
much  depends,  however,  upon  the  skill  of  the  one 
giving  the  test  to  make  the  results  reliable  except 
when  procured  by  experts.  Hence,  a  general  use  of 
these  tests  is  not  to  be  recommended  unless  con- 
ducted by  carefully  trained  men. 

A  special  warning  is  not  out  of  place  against  the 
many  fake  schemes  which  are  advertised  by  corre- 
spondence schools  and  book  companies  as  infallible 
methods  of  reading  character.  The  shape  of  the 
nose  or  a  bump  on  the  forehead  of  the  applicant 
has  no  more  to  do  with  his  character  and  mental 
ability  than  the  position  of  the  moon  and  the  stars 
at  the  date  of  his  birth.  There  is,  at  any  rate  up 
to  the  present,  no  truly  scientific  basis  for  any 
of  these  character  reading  schemes. 

In  each  employment  office  there  should  be  one  or 
more  interviewers  who  have  a  good  knowledge  of 
the  various  jobs  that  are  to  be  filled.  The  education 
of  the  candidate,  his  general  appearance,  his  method 
of  approach,  the  way  in  which  he  answers  questions, 
the  record  of  his  work  before  making  application, 
may  all  lead  to  a  basis  for  a  fairly  good  guess  regard- 
ing his  general  character  and  skill. 

Vest/ibule  Schools.  Where  young  and  inexperienced 
help  is  hired  or  where  the  work  of  the  factory  or  office 


BUSINESS      ORGANIZATION  1 87 

is  highly  speciahzed,  it  is  usually  necessary,  and 
always  desirable,  to  give  the  employee  a  shorter  or 
longer  period  of  training.  This  training  in  what  are 
sometimes  called  vestibule  schools  has  two  advantages : 

1 .  The  employee  receives  instruction  in  specialized  work 

and  becomes  therefore  more  quickly  adapted  and 
more  highly  skilled  than  some  one  who  is  left  to  find 
his  way  independently. 

2.  The  elimination  of  the  poor  worker,  of  the  man  who 

applied  for  a  job  for  which  he  is  not  fitted,  takes 
place  before  he  enters  the  factory.  He  is  under  close 
supervision  in  the  school  and  any  deficiency  is 
quickly  detected.  Such  men  are  not  necessarily  dis- 
charged, but  may  be  directed  into  some  other  line  of 
work  for  which  they  are  better  adapted. 

Mr.  H.  E.  Miles  of  the  Council  of  National 
Defense  investigated  a  number  of  industries.  In 
describing  the  training  room  or  vestibule  school 
established  by  one  of  these,  he  says: 

The  test  of  it  is  that  of  those  who  enter  this  factory 
only  two  or  three  per  cent  leave.  About  ten  per  cent 
are  eliminated  in  the  training  room — the  perfect  place  for 
elimination.  The  production  of  the  training  room  work- 
ers in  this  factory  is  not  far  from  twenty-five  per  cent 
greater  than  the  untrained  from  the  employment  office. 

It  should  be  understood  that  these  schools  differ 
from  schools  in  the  ordinary  sense  in  that  all  work 
performed  is  on  a  production  basis;  they  are  a  part 
of  the  factory  itself. 


l88  BUSINESS      ORGANIZATION 

Introducing  the  Employee  to  His  Surroundings. 
One  very  eSvSential  aid  in  making  the  employee  a  real 
member  of  the  company  is  to  explain  to  him  the 
organization  chart  of  the  company.  He  may  then 
understand  his  relative  position,  and  will  also  have  a 
better  grasp  of  the  importance  of  many  details 
and  much  "red  tape"  which  otherwise  he  would  not 
be  able  to  understand. 

In  addition  to  this  general  information  about  his 
place  in  the  organization,  he  should  receive  written 
instructions  pertaining  to  his  particular  job.  Many 
large  firms,  such  as  the  Ford  Motor  Company,  the 
National  Cash  Register  Company,  and  the  Alexander 
Hamilton  Institute,  have  prepared  attractive  book- 
lets which  are  given  to  new  employees,  in  which  the 
functions  of  the  different  departments,  the  policies 
of  the  company,  the  rights,  duties,  and  privileges  of 
employees,  and  the  duties  of  the  new  employees  are 
explained. 

Record  of  Service.  After  the  workman  or  office  em- 
ployee has  been  allowed  to  enter  the  employ  defin- 
itely, it  is  necessary  that  a  careful  record  be  kept  of 
all  transfers,  changes  in  rates,  sickness,  tardiness, 
and  other  information  concerning  him  which  in  the 
future  will  be  helpful  as  an  aid  in  determining  the  fit- 
ness of  the  employee  for  the  position  he  occupies  or 
for  some  other  position  higher  up.  This  information 
may  also  lead  to  the  discovery  of  important  facts. 
If  the  amount  of  sickness  or  tardiness,  or  the  number 


BUSINESS     ORGANIZATION  189 

of  accidents  in  one  department  far  exceed  that  in 
another,  an  investigation  may  disclose  conditions 
which,  when  remedied,  will  raise  the  general  efficiency 
of  the  plant  and  will  give  the  workers  more  adequate 
protection. 

Investigation  of  Grievances,  Where  a  centralized 
employment  office  is  maintained,  the  authority  of 
firing  is  taken  out  of  the  hands  of  the  foreman  or  of 
departmental  heads.  This  makes  for  greater  har- 
mony in  the  organization  and  a  better  feeling  of 
fellowship.  The  foreman  is  no  longer  an  absolute 
monarch.  There  is  a  direct  appeal  for  any  man  who 
feels  that  he  has  a  just  grievance.  The  employment 
office  makes  investigations  of  complaints,  whether 
they  concern  material  conditions  or  persons,  and  en- 
deavors to  bring  about  friendly  agreements  in  dis- 
putes and  to  eradicate  evil  conditions.  The  employ- 
ment office  should  obtain  the  confidence  of  the  em- 
ployee as  a  fair  arbitrator  in  disputes. 

A  Check  on  Labor  Turnover.  The  work  of  the  em- 
ployment office  should  result  in  a  lessened  rate  of 
labor  turnover.  All  men  recommended  for  discharge 
should  be  interviewed  and  their  record  since  the  be- 
ginning of  their  employment  looked  up.  The  em- 
ployment manager  should  ascertain  why  the  em- 
ployee was  recommended  for  discharge,  and  the  em- 
ployee should  be  given  an  opportunity  to  state  his 
case.  Where  inefficiency  is  the  cause,  a  study  of  the 
man's  record  should  be  made  to  ascertain  whether 


I90 


BUSINESS     ORGANIZATION 


circumstances  beyond  the  control  of  the  employee 
may  have  been  to  blame.  Bad  health,  family  trou- 
bles, financial  worries,  or  an  antipathy  for  the  fore- 
man or  some  coworker  may  lie  at  the  bottom  of  the 
whole  trouble,  or  it  may  be  that  the  man  is  working 
at  an  uncongenial  task.  In  such  cases  a  transfer  to 
some  other  kind  of  work  may  save  the  man  from  dis- 
charge to  the  great  benefit  of  his  own  future,  of  that 
of  the  organization,  and  of  society.  When  discharge 
is  necessary,  a  record  should  be  kept  of  the  discharge. 
The  accumulated  facts  may  aid  sometimes  in  tracing 
a  hidden  source  of  trouble  and  in  eradicating  it.  The 
following  is  a  discharge  blank  used  in  one  large 
western  plant: 


LEAVING 

NOTICE 

"^ 

CHECK 

EMPLOYEES    NAME      ' 

Drp>. 

Rf».oii 

Skill 

PmH,.riT 

Dtoon. 

K.^V.-N. 

0-.  A.  !»d 

P^"" 

^ 

gl^ 

X^ 

^ 

m 

s 

y^'^^ 

k/N^y^ — sy^ 

Lrl 

^j 

A_i 

•fci^- 

l^ 

1.-.^-— ^ 

The  employment  office  may  also  be  instrumental 
in  creating  a  better  spirit  in  an  organization  by  exer- 
cising thoughtfulness  in  regard  to  the  many  details 
of  the  relation  between  employer  and  employee 
which  often  are  a  fertile  ground  for  friction.  Such 
matters  as  the  technique  of  wage  payment  are  fre- 
quently looked  upon  as  unimportant.  From  the 
workingman's  point  of  view  it  makes  quite  a  differ- 
ence whether  he  is  paid  in  cash  or  by  a  check,  which 


BUSINESS     ORGANIZATION  I9I 

he  may  have  difficulty  in  cashing  except  at  some 
saloon  or  store,  and  then  frequently  at  a  heavy  dis- 
count. These  and  a  large  number  of  other  details 
are  frequently  overlooked,  to  the  great  detriment  of 
an  organization.  The  efficiency  of  a  business  estab- 
lishment, of  an  army,  of  any  organized  group  of  hu- 
man beings  is  determined  by  the  morale,  and  the 
morale  is  shaped  by  a  multitude  of  petty  details 
which  make  life  a  burden  or  a  joy. 

The  Educational  Office.  The  work  of  the  employ- 
ment office  is  supplemented  by  that  of  the  educa- 
tional office.  This  office  will  usually  take  charge  of 
the  preliminary  or  "vestibule"  training  of  the  new 
employees,  and  will  attempt  to  raise  the  intellectual 
level  of  the  entire  body  of  workers.  Popular,  illus- 
trated lectures  on  current  topics,  evening  classes  in 
grammar  school  and  high  school  subjects,  and  special 
vocational  training  are  some  of  the  more  commonly 
found  activities. 

The  General  Electric  Company,  the  National  City 
Bank,  Wanamaker's  Department  Store,  W.  R.  Grace 
and  Company,  exporters,  are  examples  in  different 
commercial  fields  of  firms  which  maintain  special 
training  classes.  Originally  started  to  give  highly 
technical  and  specialized  training,  such  schools  have 
gradually  come  to  the  realization  that  general  infor- 
mation and  intelligence  are  quite  as  necessary  as  the 
purely  technical  training.  For  this  reason  many 
of  these  schools  are  now  supplementing  their  technical 


192  BUSINESS     ORGANIZATION 

work  with  lectures  on  general  sociology,  philosophy, 
art,  economics,  and  literature.  These  corporation 
schools  have  formed  a  society  called  the  Association 
of  Corporation  Schools. 

For  the  benefit  of  those  interested  in  technical  lit- 
erature a  technical  library  and  a  number  of  trade 
papers  and  technical  magazines  may  be  placed  in  a 
reading  room,  where,  during  the  lunch  period,  a  few 
profitable  minutes  may  be  spent.  A  circulating  li- 
brary is  also  frequently  found.  In  many  plants  the 
educational  department  publishes  a  paper  or  maga- 
zine, where,  besides  interesting  items  about  events 
and  persons,  much  valuable  information  about  the 
processes,  policy,  and  marketing  methods  of  the 
firm  are  given. 

In  some  cases  the  educational  work  in  hygiene  is 
also  in  the  care  of  the  educational  department, 
though  in  many  plants  this  work  falls  under  the  care 
of  the  health  department. 

The  Suggestion  Box.  Another  important  activity  is 
frequently  carried  on  by  the  educational  department, 
namely,  the  administration  of  the  suggestion  box. 
In  order  to  encourage  the  employees  to  take  an  inter- 
est in  their  work  they  are  asked  to  make  suggestions 
to  the  management.  The  suggestions  are  placed  by 
the  workmen  in  envelopes  provided  for  that  purpose 
and  deposited  in  a  box.  Once  a  week  these  boxes  are 
emptied  and  the  suggestions  examined. 


BUSINESS     ORGANIZATION  193 

In  some  factories  a  special  suggestion  committee 
composed  of  both  executives  and  workmen  investi- 
gates these  suggestions.  In  other  concerns  the  edu- 
cational department  is  in  charge 'of  this  inspection. 
Usually  the  heads  of  the  departments  affected  by  the 
suggestions  express  their  opinion  concerning  their 
value.  Usable  suggestions  are  rewcirded,  sometimes 
by  money  rewards  and  sometimes  by  privileges.  In 
one  large  eastern  book  publishing  house  all  successful 
competitors  are  guests  of  honor  at  an  annual  ban- 
quet, and  their  prizes  are  handed  to  them  at  that 
time  with  an  appropriate  address  by  the  general 
manager. 

Many  large  department  stores  have  the  suggestion 
system.  One  large  store  in  Seattle  has  found  it  very 
helpful  and  a  number  of  improvements  have  resulted 
from  its  introduction.  Such  suggestions  as  to  pro- 
vide the  trucks  with  rubber  wheels,  to  change  the 
position  of  a  counter  to  allow  for  better  light,  to  re- 
arrange the  receiving  room — all  dealing  with  small 
but  important  details,  were  the  results  of  the  sugges- 
tion system. 

Health  Department,  Another  very  important  de- 
partment in  the  service  group  is  the  health  depart- 
ment. The  duties  of  this  department  are  to  give  all 
new  applicants  a  physical  examination  in  order  to 
determine  their  general  condition  of  health  and  to 
locate  any  physical  defects  which  they  may  have; 
to  make  periodic  examinations ;  to  provide  treatment 


194  BUSINESS     ORGANIZATION 

in  all  accidents  and  in  some  surgical  and  medical 
cases;  to  co-operate  with  the  safety  department  in 
establishing  better  sanitation,  and  as  far  as  possible 
to  render  work  safe. 

The  health  department  may  also  render  valuable 
service  in  the  drawing  up  of  the  job  specifications. 
Many  jobs  do  not  require  fully  able-bodied  men.  By 
means  of  carefully  prepared  job  specifications  men 
who  otherwise  would  have  been  judged  physically 
disqualified  may  become  valuable  workmen. 

Safety  and  Sanitation  Department.  Another  step  in 
the  direction  of  true  efficiency  is  observed  in  the  es- 
tablishing of  a  safety  and  sanitation  department.  It 
is  not  necessary  to  explain  in  detail  the  duties  and  the 
work  of  such  a  department ;  its  most  important  func- 
tion is  the  elimination  of  industrial  risk. 

In  this  work  the  department  will  need  the  hearty 
co-operation  of  the  engineering  department.  Some 
changes  in  the  machines,  small  outlays  for  railings, 
for  screens  to  cover  exposed  gears,  and  even  for  a 
quart  of  white  paint  with  which  to  brighten  up  a 
dark  comer  may  often  save  life  and  limb.  A  sugges- 
tion box  maintained  by  the  department  often  leads 
to  valuable  improvements. 

One  of  the  important  phases  of  the  work  is  to  teach 
working  men  the  value  of  safety  devices.  It  is  curi- 
ous that  many  of  them  deliberately  cast  aside  safety 
devices,  and  prefer  to  run  the  risk  of  injury  or  death. 
Many  accidents  that  occur  in  the  building  of  sky- 


BUSINESS     ORGANIZATION  I95 

scrapers  result  from  the  refusal  on  the  part  of  the 
workers  to  use  the  safety  appliances  placed  at  their 
disposal. 

Welfare  Work.  The  responsibility  of  the  employer 
is  not  confined  within  the  walls  of  the  office  or  fac- 
tory, nor  would  it  be  to  his  advantage  to  consider  as  of 
no  interest  to  him  how  the  employees  live  and  spend 
their  leisure,  and  whether  they  lay  away  something 
for  their  old  age.  Happy,  enthusiastic  workers  can- 
not develop  where  home  conditions  sap  the  vitality 
and  attack  the  morals  of  men  and  women.  Poorly 
ventilated  houses,  lack  of  good  nourishment,  even- 
ings spent  at  carousing  and  drinking  instead  of  in 
wholesome  amusement,  mean  inefficient,  listless 
workers. 

Many  large  corporations,  realizing  the  importance 
of  aiding  their  employees  to  attain  and  maintain 
good  living  conditions,  provide  wholesome  recreation 
for  them,  establish  building  and  loan  funds  from 
which  the  workers  may  borrow  in  order  to  build 
their  homes,  establish  stores  which  supply  the  em- 
ployees at  cost,  and  encourage  their  employees  to 
save  by  establishing  a  savings  bank  at  the  plant. 

Some  companies,  like  the  Sunlight  Company  near 
Liverpool,  and  the  Pullman  Company  near  Chicago, 
have  built  model  workingmen's  villages.  Here 
moderately  priced  cottages  with  ample  gardens  have 
been  built  by  good  architects.  The  workmen  may 
rent  these  houses  at  a  low  rent  and  may  often  allow 


196  BUSINESS     ORGANIZATION 

the  rent  to  apply  on  the  purchase  price.  The  Ford 
Motor  Company,  the  Jeffries  Manufacturing  Com- 
pany in  Columbus,  and  a  long  list  of  the  most  pro- 
gressive companies  in  this  country  and  Europe,  have 
undertaken  work  of  this  kind.  The  establishing  of 
insurance  funds  in  which  the  employees  may,  or  in 
some  cases  must,  insure  themselves  against  sickness, 
accident,  and  old  age,  is  also  becoming  more 
general. 

There  seems  to  be  a  growing  tendency  to  take  this 
welfare  work  out  of  the  hands  of  the  management 
and  to  place  it  in  the  hands  of  co-operative  under- 
takings  made  up  of  employees,  with  possibly  a  small 
number  of  the  firm's  executives  as  advisors.  This 
method  is  better  adapted  to  American  conditions 
than  the  paternalistic  plans  copied  from  European 
countries.  The  American  workingman  does  not  like 
to  feel  that  he  is  being  made  the  subject  of  charity. 
He  is  more  or  less  suspicious  of  the  management 
which  introduces  welfare  work,  because  he  sees  in  it 
a  confession  that  wages  are  not  sufficient  to  supply 
the  worker  with  anything  besides  necessities.  The 
co-operative  undertaking,  under  guidance  of  the  ser- 
vice department,  seems  to  hold  out  the  greatest 
promise  of  success.  As  an  example  of  such  a  co-opera- 
tive association,  the  following  organization  chart  of 
an  association  founded  in  191 5  in  a  large  department 
store  on  the  Pacific  coast  is  here  given. 


BUSINESS      ORGANIZATION  I97 


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gwNs]    [^^    IpmilmAmonk:!   [f^   [^°^  p^^  I  TnLn 


i;ig  in^ka  pixr^ 


The  aim  of  this  association  as  stated  in  its  consti- 
tution is  "to  increase  efficiency,  to  add  to  social  op- 
portunities, to  create  and  sustain  a  just  and  equitable 
relation  between  employer  and  employee." 

This  store,  at  one  time  known  as  having  the  largest 
labor  turnover  of  any  in  the  city,  through  its  cen- 
tralized employment  service,  its  educational  work, 
and  through  its  co-operative  association,  has  com- 
pletely changed  the  spirit  of  the  store.  The  labor 
turnover  has  constantly  decreased  during  the  last 
three  years.  Patrons  who  have  traded  at  this  store 
for  years  are  enthusiastic  about  the  change  in  the 
atmosphere.  The  clerks  have  caught  the  spirit  of 
service,  they  have  the  interest  of  the  concern  at 
heart,  and  they  have  confidence  in  the  fairness  and 
reasonableness  of  their  employers.  They  speak  of 
the  store  as  "their"  store,  so  thoroughly  has  the  new 
spirit  done  its  work.  The  soulless  organization  in 
which  the  employees  were  members,  scrapped  if  un- 
satisfactory, retained  if  profitable,  has  been  changed 
into  a  family  of  workers,  enthusiastically  working  for 
the  success  of  the  store,  proud  of  their  work  as  a  ne- 


198 


BUSINESS     ORGANIZATION 


cessary  part  of  that  success,  and  permeated  with  a 
spirit  of  mutual  helpfulness  which  has  made  the 
store  the  most  popular  in  the  city. 

The  following  chart  gives  a  complete  picture  of  the 
various  functions  of  a  service  department.  This 
chart  was  prepared  by  Dr.  R.  S.  Quinby,  Service 
Manager  of  the  Hood  Rubber  Company: 

ORGANIZATION  AND  FUNCTIONS  OF  SERVICE  DEPARTMENT 

SERVICE  MANAGER 


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Summary.  Centralization  and  control  of  the  work- 
ing force  makes  for  greater  efficiency  and  secures  a 
more  stable  body  of  workmen.  Many  functions 
which  supplement  the  employment  office  are  grouped 
with  it  under  the  service  department. 


BUSINESS     ORGANIZATION  I99 

The  employment  office  is  the  most  important  of 
these  service  offices.  The  labor  turnover,  with  its 
social  and  commercial  losses,  is  diminished  as  a  re- 
sult of  a  study  of  its  causes  and  the  elimination  of 
many  of  them.  The  employment  office  studies  both 
applicant  and  boss,  brings  the  two  together,  starts 
the  workingman  out  and  is  always  ready  to  aid  him 
in  making  good.  Transfers  and  supplementary  edu- 
cation take  the  place  of  discharges. 

The  educational,  health,  and  safety  offices  are  also 
of  great  importance,  while  the  welfare  work  aids 
greatly  in  stabilizing  the  working  force  by  establish- 
ing pleasant  surroundings  at  home  and  higher  ideals 
in  education  and  amusements.  Co-operative  welfare 
work  usually  leads  to  better  results  than  paternalistic 
efforts. 

REFERENCES 

Same  as  preceding  chapters.    Additional  references: 

R.  W.  Kelly.  Hiring  the  Worker.  The  Engineering 
Magazine  Company. 

A  Thumbnail  Sketch  of  the  Filene  Co-operative  Association. 
Wm.  Filene's  Sons  Company,  Boston. 

Employees  Handbook  of  the  National  Cash  Register  Com- 
pany.   Dayton,  Ohio. 

American  Academy  of  Political  and  Social  Science, 
Stabilizing  Industrial  Employment.  Annals  of  the 
Academy.    May,  1917,  Vol.  LXXI,  whole  No.  160. 

American  Academy  of  Political  and  Social  Science, 
Personnel  and  Employment  Problems  in  Industrial 
Management.    Annals  of  the  Academy.    Vol.  LXV,  No. 


200  BUSINESS     ORGANIZATION 

154.     May,   191 6.     Editors:    Meyer  Bloomfield  and 
Joseph  H.  Willits. 

QUESTIONS  FOR  FURTHER  STUDY 

1.  What  are  some  of  the  remedies  proposed  for  the 
waste  in  hiring  and  discharging  employees? 

References:  Waste  in  Hiring  and  Discharging  Em- 
ployees. M.  W.  Alexander.  Scientific 
American  Supplement,  No.  2041,  Feb- 
ruary 13,  1915,  pp.  I02ff. 
Kelly.  Chapter  XL 
Annals  of  the  Academy,  Vol.  LXXI, 
Part  I. 

2.  What  is  meant  by  a  centralized  employment  de- 
partment? 

Reference:  Annals  of  the  Academy,  Part  II,  Vol. 
LXV. 

3.  What  are  some  of  the  advantages  of  giving  the  em- 
ployees a  vofce  in  the  management  of  the  industry? 

Reference:  Annals  of  the  Academy,  Vol.  LXXI, 
Part  V. 

4.  Describe  how  a  job  is  analyzed. 
Reference:    Kelly.    Chapter  V. 

5.  Are  many  firms  aware  of  the  need  of  special  and 
general  training  for  their  employees?  Describe  some 
successful  vestibule  school. 

References:   Kelly.  Chapter  VII. 

Duncan.    Chapter  XIV. 

6.  Visit  some  store  or  factory  in  your  locality  which 
maintains  an  employment  office.  Compare  the  blanks 
and  records  used  in  that  office  with  those  given  by  Kelly 
in  Chapter  X.    Answer  the  following  questions: 


BUSINESS      ORGANIZATION  201 

(a)  Which  blanks  given  by  Kelly  are  not  found  in 

the  office  visited?    . 

(b)  Is  there  any  good  reason  for  their  absence? 

(c)  In  what  respect  are  the  blanks  used  different 

from  those  given  by  Kelly? 

(d)  Do  you  see  any  good  reason  for  the  difference? 

Could  Kelly's  blanks  be  used  without  any 
changes? 

7.  Draw  up  a  list  of  all  the  functions  that  may  be 
demanded  of  an  employment  manager. 

Reference:   Kelly.    Chapter  III. 

Study  the  chart  at  the  end  of  this  chapter. 

8.  Draw  up  a  similar  list  of  the  various  kinds  of  wel- 
fare work  that  may  be  undertaken. 

References:  Jones.    Chapter  XV. 

Parsons.  Office  Organization  and  Man- 
agement. Chapters  XII,  XIII,  XIV, 
XV,  XVI. 

Filene's  Co-operative  Association. 
National  Cash  Register  Company  Em- 
ployees Handbook. 

TEST  QUESTIONS 

1.  Why  is  centralization  of  hiring  and  discharging  a 
desirable  thing? 

2.  Why  is  a  large  labor  turnover  very  expensive? 

3.  What  is  meant  by  a  job  specification?  Explain  the 
part  played  by  this  in  the  management  of  labor. 

4.  What  is  a  vestibule  school? 

5.  Can  you  see  any  good  reason  why  an  employment 
office  should  co-operate  closely  with  the  health  office  and 
the  engineering  office? 


202  BUSINESS      ORGANIZATION 


CHAPTER   X 

SELECTING  THE  SITE 

The  Location  of  the  Plant  Demands  Careful  Study. 
Since  the  manufacturer  finds  his  profit  in  the  margin 
between  his  cost  and  his  seUing  price,  he  must  en- 
deavor to  make  his  cost  as  small  as  possible,  and  his 
selling  price  as  high  as  possible.  The  selling  price  is 
frequently  quite  beyond  his  control.  The  price  at 
which  his  competitors  are  selling  and  the  willingness 
of  the  consumer  to  pay  a  certain  price  and  no  more, 
frequently  determine  the  price  at  which  he  must  sell. 
The  manufacturer  is,  therefore,  very  much  inter- 
ested in  keeping  his  costs  down.  The  location  of  his 
factory  plays  an  important  part  in  his  cost  of  pro- 
duction. It  is  easy  to  see  that  it  would  not  pay  to 
build  an  automobile  factory  in  the  heart  of  New 
Mexico  nor  a  salmon-packing  plant  in  Detroit.  But 
it  takes  careful  study  to  determine  whether  Detroit, 
Chicago,  or  New  York  is  the  most  desirable  location 
for  a  lens-grinding  plant.  We  must,  therefore,  ana- 
lyze the  factors  in  plant  location. 

Nearness  to  Raw  Material.  One  of  the  reasons  why 
it  would  be  foolish  to  locate  a  salmon-packing  plant 
in  Chicago  is  because  the  raw  material  would  have 
to  be  transported  from  Alaska  or  the  Puget  Sound 


204  BUSINESS     ORGANIZATION 

region.  This  wouW  be  impracticable  for  two  reasons. 
First  of  all,  salmon  is  perishable.  To  be  sure,  it 
would  be  possible  to  ship  the  salmon  in  refrigerator 
cars,  but  that  would  be  quite  costly.  In  the  second 
place,  in  shipping  the  whole  salmon  a  lot  of  waste 
would  be  shipped,  Not  more  than  60  per  cent  of 
the  entire  salmon  is  actually  put  in  cans.  To  ship 
the  other  40  per  cent  two  thousand  miles  only  to 
throw  it  away  after  arrival,  is  not  reasonable. 

This  principle  explains  why  lumber  mills  are  lo- 
cated within  easy  reach  of  the  timber  lands.  In  the 
process  of  squaring  and  sawing,  more  than  40  per 
cent  of  the  standing  tree  is  cast  aside  as  waste. 
Moreover,  the  boards  and  laths  are  more  easily 
handled  than  the  original  logs.  On  the  other  hand 
it  is  better  to  locate  the  planing  mill  near  the  place 
where  the  lumber  is  to  be  used,  for  in  transportation 
the  finished  lumber  would  be  subject  to  damage  and 
deterioration. 

We  may  conclude,  then,  that  it  is  safe  to  say  that 
whenever  the  raw  material  is  perishable,  or  contains 
a  large  percentage  of  waste,  it  is  often  best  to  locate 
the  factory  relatively  near  the  source  of  raw  ma- 
terial. 

Why  relatively  near?  Because  other  factors  enter 
in  to  change  our  conclusion  somewhat.  It  pays  to 
ship  logs  tied  together  by  chains  into  huge  rafts  from 
Norway  to  the  sawmills  of  England,  Germany,  and 
Holland,  because  the  cost  of  towing  them  across 


BUSINESS     ORGANIZATION  205 

with  ocean-going  tugs  is  much  less  than  shipping  the 
hnished  lumber  they  yield,  the  same  distance.  The 
relative  cost  of  transportation  must  be  taken  into 
account. 

Sometimes,  as  in  the  case  of  iron  and  steel,  one  car- 
load of  raw  material  makes  many  carloads  of  finished 
goods.  The  finished  goods,  moreover,  pay  a  higher 
freight  rate.  In  such  cases  it  is  better  to  bring  the 
raw  material  to  the  place  where  the  finished  product 
is  to  be  sold. 

Frequently  it  Is  possible  to  eliminate  some  of  the 
waste  in  the  raw  material  before  starting  it  on  its 
long  journey.  The  concentrators  in  the  Joplin  dis- 
trict reduce  the  crude  zinc  ore  sometimes  as  much 
as  80  per  cent  in  weight  before  it  is  shipped  to  the 
distant  smelters.  Where  more  than  one  raw  ma- 
terial is  used  the  calculation  becomes  quite  involved, 
but  the  principles  here  outlined  apply  neverthe- 
less. 

Another  factor  of  importance  is  the  quantity  of 
raw  material  available.  It  obviously  is  not  good 
business  to  build  a  lumber  mill  near  a  timber  claim 
when  the  amount  of  timber  is  so  small  that  it  will  be 
exhausted  long  before  the  plant  is  worn  out. 

Nearness  to  Market.  Some  industries  can  only  be 
advantageously  located  near  the  market  where  the 
finished  product  is  to  be  sold.  The  reason  for  this 
frequently  lies  in  the  perishable  nature  of  the  finished 
product  and  in  the  relatively  higher  freight  rates. 


206  BUSINESS     ORGANIZATION 

We  have  seen  that  the  planing  mills  are  in  this  class. 
Often  the  industry  derives  a  large  income  from  the 
sale  of  by-products  which  do  not  bear  transportation, 
or  it  may  be  that  the  products  are  produced  largely 
to  order,  in  which  case  nearness  to  the  market  is 
almost  always  necessary.  The  machine  tool  industry 
will  be  found  near  the  place  where  the  tools  are  used. 
It  may  also  be  that  the  industry  depends  upon  the 
finished  products  of  other  industries.  What  are 
called  "assembling"  industries  are  usually  located 
nccir  the  market.  In  that  way  they  are  sure  of  a 
supply  of  component  parts  cind  avoid  double  freight 
rates. 

Available  Labor  Supply.  Many  sections  of  the 
country  are  industrially  undeveloped,  not  because 
they  lack  the  raw  material  or  the  markets,  but  be- 
cause labor  cannot  be  secured  at  a  reasonable  price. 
It  may  seem  strange  that  labor  can  be  so  scarce  in 
some  sections,  while  it  is  plentiful  in  others,  but  it  is 
a  well-known  fact  that  labor  does  not  move  freely; 
is  not  "mobile." 

It  takes  a  certain  amount  of  courage  to  leave  the 
home  town  and  to  strike  out  for  a  new  place;  it 
also  takes  money  to  travel.  Few  men  have  both  the 
courage  and  the  money.  The  result  is  that  labor 
moves  but  slowly  in  the  direction  of  higher  wages  and 
plentiful  employment.  The  workingmen  who  do 
move  are  often  single  men  who  quickly  grow  restless 
p^nd  move  on  again  after  a  short  stay. 


BUSINESS     ORGANIZATION  207 

This  moving  labor  is  an  expensive  kind  of  labor 
for  the  employer.  As  we  have  seen  in  an  earlier  chap- 
ter, it  takes  time,  effort,  and  money  to  train  men  for 
any  occupation.  Even  where  a  man  is  skilled  in  a 
certain  line  of  work  he  must  be  trained  to  fit  into  an 
organization  so  that  he  may  perform  his  duties  ef- 
ficiently. A  constantly  changing  labor  force  is  ex- 
pensive for  that  reason. 

Sometimes  an  industry  may  be  most  advantage- 
ously located  where  there  happens  to  be  a  plentiful 
supply  of  the  kind  of  labor  the  industry  needs.  Many 
a  town  has  become  the  center  of  an  important  in- 
dustry because  immigrants,  skilled  in  certain  trades, 
found  it  attractive  for  settlement.  The  pottery  in- 
dustry is  a  good  example. 

Other  sections  of  the  country  will  continue  to  be 
industrially  backward  because  of  the  absence  of  a 
suitable  labor  supply.  The  silk  industry  in  southern 
California  and  in  Texas  is  suffering  from  this  lack  of 
labor,  and  will  not  for  many  years  become  a  flourish- 
ing industry,  notwithstanding  the  ideal  climatic  con- 
ditions. 

The  Power  Factor.  The  presence  of  a  source  of 
cheap  power  for  the  driving  of  the  machinery  of  the 
factory  often  outweighs  many  other  considerations. 
Before  the  introduction  of  steam  and  electricity  as 
motor  powers,  factories  were  located  near  rivers  and 
waterfalls  from  which  cheap  power  could  be  ob- 
tained. 


208  BUSINESS     ORGANIZATION 

The  textile  industry  chose  Massachusetts  during 
the  early  years  of  the  development  of  this  American 
industry  because  abundant  water  power  was  avail- 
able. To  be  sure,  this  necessitated  the  transportation 
of  the  raw  cotton  over  a  long  distance,  but  good 
water  connections  reduced  the  seriousness  of  this 
disadvantage. 

The  fact  that  the  principal  market  for  the  finished 
product  was  in  the  northern  states  also  decided  in 
favor  of  that  location.  It  must  be  remembered  that 
raw  cotton  does  not  represent  as  large  an  investment 
as  the  finished  product.  It  was,  therefore,  cheaper  to 
carry  the  raw  cotton  over  a  long  distance  and  to  ex- 
pose it  to  danger  of  loss  and  damage  than  to  place 
the  factory  near  the  cotton  farm  and  to  ship  the 
cotton  cloth.  The  labor  factor  also  played  a  part, 
for  even  to-day  the  negro  is  not  an  ideal  factory  hand. 
He  is  lazy,  shiftless,  and  does  not  enjoy  steady  work. 

In  a  similar  manner,  many  modem  industries  are 
located  with  reference  to  the  supply  of  oil,  gas,  or 
coal.  The  expense  involved  in  transporting  these 
fuels  and  the  fact  that  coal  deteriorates  in  transport 
tation  are  all  arguments  in  favor  of  giving  careful 
consideration  to  this  factor.  The  more  fuel  a  plant 
needs  as  compared  with  other  materials,  the  more 
important  this  factor  becomes. 

Association  with  Other  Industries  Is  Beneficial.  It 
is  interesting  that  once  a  city  has  been  chosen  by  an 
industry,  that  locality  becomes  increasingly  attrac- 


BUSINESS     ORGANIZATION  209 


tive  to  similar  plants.  Many  towns  have  thus  be- 
come the  recognized  centers  of  certain  classes  of  in- 
dustry. When  we  speak  of  autos,  we  unconsciously 
think  of  Detroit.  Troy  is  associated  with  collars, 
shirts,  and  laundry  equipment.  Akron  and  auto 
tires  are  similarly  connected. 

Once  a  town  has  gained  prominence  in  this  way  it 
becomes  the  logical  place  to  locate  factories  of  the 
same  character.  If  one  should  be  looking  for  a  good 
location  for  a  furniture  factory,  one  would  find  that 
Grand  Rapids  is  exceptionally  well  suited  for  that 
purpose.  Here  one  may  find  a  large  and  skilled  labor 
supply.  Young  men  grow  up  and  learn  the  industry 
through  contact  with  their  friends  and  families, 
banks  have  experience  in  handling  the  credit  paper 
that  these  factories  have  to  sell,  and  are  in  a  position 
to  offer  lower  rates  than  a  bank  in  some  other  city 
might  ask,  because  the  business  was  unknown  there. 

Every  industry  needs  a  large  number  of  small  parts 
and  tools  which  it  must  buy  outside.  Such  secondary 
industries  cannot  be  profitably  operated  where  the 
demand  for  their  products  is  small. 

Finally,  the  name  of  the  town  associated  with  the 
product  has  a  certain  advertising  value.  Other 
things  equal,  the  Detroit-made  automobile,  will  be 
preferred  over  a  product  of,  say,  Albuquerque,  New 
Mexico. 

Transportation.  The  rates  charged  by  railway  or 
water  carrier  very  vitally  affect  the  location  of  fac- 


2IO  BUSINESS     ORGANIZATION 

tories.  Great  rivalry  exists,  therefore,  between  cities, 
and  each  endeavors  to  secure  a  railway  advantage 
over  its  rivals.  A  great  responsibility  rests  upon  the 
Government  and  especially  upon  the  Interstate 
Commerce  Commission,  for  a  difference  of  a  few 
cents  in  freight  charges  may  mean  the  difference  be- 
tween prosperity  and  ruin  for  an  industry,  and  re- 
tarded development  for  an  entire  city. 

The  transportation  factor  is  not  summed  up  in 
high  or  low  freight  rates.  The  type  of  service  which 
is  available  is  quite  as  important.  A  cheap  service, 
subject  to  delays  and  irregularities,  may  be  a  greater 
handicap  than  high  rates  coupled  with  efficient  serv- 
ice. The  location  and  efficiency  in  the  operation  of 
the  terminals  also  play  an  important  part.  Rates 
may  be  low  and  service  excellent,  but  if  the  shipment 
is  held  up  in  the  switching  yard  because  of  congestion, 
or  if  the  freight  station  is  poorly  located,  so  that  long 
delay  in  haulage  becomes  unavoidable,  these  unfavor- 
able factors  may  destroy  the  advantage  of  low  rates 
and  good  line  service.  Few  business  men  realize  how 
they  are,  to  some  extent,  to  blame  for  the  congestion 
of  our  freight  yards  by  their  failure  to  unload  the 
cars  as  soon  as  they  arrive. 

The  multiplicity  of  railway  terminals  and  the  lack 
of  proper  co-ordination  of  railway  facilities,  both  with 
each  other  and  with  the  terminals  of  water  carriers, 
is  one  of  the  most  glaring  causes  of  transportation 
inefficiency  in  this  country.    The  centralized  control 


BUSINESS      ORGANIZATION  211 

of  the  United  States  Railway  Administration  has  im- 
proved this  situation,  but  it  is  not  certain  that  these 
improvements  will  remain  effective  should  the  rail- 
ways pass  again  into  private  hands. 

Whether  to  Locate  in  City  or  Country.  Once  the 
most  advantageous  location  has  been  determined,  it 
is  necessary  to  decide  whether  the  plant  shall  be 
built  in  the  country  or  in  the  city. 

The  country  location  offers  many  attractions ;  land 
is  cheaper,  and  it  is  possible  to  have  a  spur  connect 
the  factory  with  the  railroad,  thereby  saving  great 
expense  in  drayage.  Wages  are  usually  lower  in  the 
country  and  small  town  than  in  the  city. 

But  certain  disadvantages  must  not  be  overlooked. 
In  fact,  a  small  plant  will  often  find  these  disadvan- 
tages insurmountable.  The  small  towns  almost  al- 
ways lack  the  labor  supply.  Labor  is  not  easily 
imported,  especially  not  if  the  factory  is  the  only  one 
of  its  kind  in  that  locality.  A  "one-factory  town"  is 
not  popular  with  the  workers.  Imported  labor  may 
not  be  content  to  live  away  from  the  amusements  of 
the  city.  In  order  to  keep  the  workman  satisfied  and 
to  give  them  wholesome  recreation,  large  outlays 
may  be  necessary.  One  company  spends  as  much  as 
$70,000  yearly  in  this  way. 

Another  source  of  expense  is  the  higher  insurance 
rates  which  must  be  paid  in  country  districts  with 
inadequate  fire  protection.  It  may  also  be  that  the 
freight  rates  are  higher  to  the  small  town  than  to  the 


212  BUSINESS     ORGANIZATION 

city.  It  is  not  difficult  to  see  why  this  may  well  be 
the  case.  The  long-distance  freight  may  pass  through 
the  town  on  its  way  to  the  city  as  part  of  a  limited 
freight  train,  and  return  from  the  city  by  a  local 
train.  Expenses  of  handling  a  few  cars  at  a  small 
station  are  relatively  higher  than  the  expense  of 
handling  that  same  number  in  a  larger  switching' 
yard.  The  distance  from  repair  shops  and  sub- 
sidiary industries  is  also  a  disadvantage.  All  these 
drawbacks  of  the  country  location  diminish  in  im- 
portance as  the  factory  increases  in  size  and  becomes 
a  more  self-sufficient  undertaking. 

For  the  moderately  sized  factory  the  city  may  be 
the  logical  place  to  locate.  The  disadvantages  of  the 
city  are,  nevertheless,  quite  apparent.  Because  of 
the  expensiveness  of  the  sites,  a  factory  must  build 
perpendicularly;  this  means  an  expensive  structure. 
It  means  poor  light  and  ventilation,  especially  since 
others  on  adjoining  sites  are  also  forced  to  build  high. 
It  also  means  expensive  operation.  As  we  shall  see 
later,  transportation  of  goods  through  the  factory 
slows  down  to  a  marked  degree  when  goods  must  be 
lifted  from  one  floor  to  another.  The  whole  factory 
is,  therefore,  slowed  down  to  a  less  efficient  rate  of 
production.  If  we  add  to  this  the  unfavorable  living 
conditions  found  in  the  larger  cities,  which  lower  the 
vitality  and  efficiency  of  the  workers,  then  we  see 
clearly  that  the  matter  of  choosing  the  site  is  not 
easily  disposed  of. 


BUSINESS     ORGANIZATION  213 

Inducements  Offered  hy  Cities.  When  a  city  grov/s, 
the  land  values  increase,  and  stores  and  restaurants 
and  many  other  kinds  of  business  enterprises  make 
more  money.  Hence  business  men  are  vitally  inter- 
ested in  aiding  the  growth  of  the  city  in  which  they 
are  located.  One  way  of  bringing  about  this  growth 
is  to  attract  factories.  Factories  will  draw  a  popula- 
tion of  workers  and  will  increase  activities  in  the 
banking  and  building  fields. 

Many  plans  are  used  by  ambitious  business  men 
to  induce  manufacturers  to  locate  in  their  town. 
Free  sites  may  be  offered,  or  free  use  of  site  or 
building,  with  option  to  buy  at  the  end  of  a  certain 
period.  In  other  cases  free  fuel,  free  power,  exemp- 
tion from  taxation,  or  even  a  cash  bonus  may  be  held 
out  to  persuade  the  manufacturer  to  decide  in  favor 
of  the  town. 

Sometimes  methods  are  devised  to  aid  in  the  fi- 
nancing of  the  enterprise.  A  loan  corporation  may 
be  formed  by  the  business  men  and  banks  which  will 
lend  money  at  a  low  rate  to  new  enterprises.  The 
town  may  organize  a  financial  company  which  buys 
stock  in  new  industrial  undertakings;  or  a  credit 
fund  may  be  established  which  endorses  the  notes  of 
new  concerns  and  thereby  rnakes  discounting  at  the 
regular  banks  possible.  These  schemes  only  too 
often  attract  industries  which  should  not  be  located 
in  those  communities,  or  which  are  launched  by  dis- 
honest and  unscrupulous  men.    The  wrecks  of  such 


214  BUSINESS     ORGANIZATION 

artificially  supported  enterprises  may  be  seen  in 
many  an  American  town. 

One  of  the  most  interesting  and  businesslike 
methods  of  attracting  new  industries  is  the  factory 
incubator.  Toledo  and  many  other  enterprising 
cities  have  a  number  of  large  factory  buildings  of  the 
newest  type  of  construction  and  completely  equipped 
with  the  necessary  power  and  light.  New  industries 
may  here  rent  factory  space,  a  whole  floor  or  a  part 
of  a  floor.  The  rental  includes  the  use  of  the  eleva- 
tor, the  switching  facilities,  and  sometimes  also  of 
the  general  employment  office  maintained  in  the 
building.  Power,  heat,  and  light  are  usually  sold  by 
meter  rates.  In  this  way  a  new  enterprise  may  start 
operation  without  being  forced  to  tie  up  a  large  share 
of  its  funds  in  capital  investments.  Once  the  success 
of  the  undertaking  has  been  assured,  an  independent 
building  may  be  built. 

Deciding  upon  the  Site.  After  the  decision  has 
been  made  in  regard  to  the  town  or  the  section  of  the 
country  in  which  the  factory  shall  be  located,  the 
exact  site  must  be  selected.  This  again  opens  up 
difficult  problems.  Many  real  estate  firms  will  pre- 
sent their  offerings  and  each  will  have  a  very  good 
reason  why  its  factory  site  is  better  than  all  others  in 
the  city.  The  manufacturer  must  proceed  cautiously, 
for  a  factory  once  built  cannot  be  moved  and  fre- 
quently cannot  be  sold  to  advantage. 


BUSINESS      ORGANIZATION  2I5 

The  principal  question  is  not  so  much  the  price 
of  the  land  as  the  facilities  which  the  site  offers.  In 
case  much  of  the  raw  material  needed  can  be  moved 
cheaply  by  water,  a  water  frontage  on  a  canal  or  a 
lake  accessible  to  ships  carrying  this  material  is 
worth  a  great  deal.  It  will  mean  a  large  yearly 
saving  in  dray  age.  The  distance  to  the  nearest  rail- 
road station  or  the  possibility  of  having  a  spur  in- 
stalled by  means  of  which  the  freight  cars  can  be 
brought  right  into  the  factory,  all  play  a  part.  If 
the  site  is  near  a  large  city  where  a  "switching  dis- 
trict" has  been  established,  it  is  highly  important  to 
know  whether  the  site  is  inside  or  outside  this 
'Witching  district."  If  outside,  a  higher  rate  will 
have  to  be  paid  to  the  railroad  for  handling  the  cars^ 
and  much  delay  will  result  when  cars  are  to  be  trans- 
ferred  from  one  line  to  another.  The  insurance  rates,, 
the  nearness  of  residences  which  might  lead  to  com- 
plaints in  regard  to  the  smoke  or  odor  created  by  the 
factory,  the  street  car  connections  with  the  working- 
men's  residential  district,  and  the  possibilities  for 
future  enlargements  must  all  be  considered  when  se- 
lecting the  site. 

Wholesale  and  Retail  Locations.  The  locating  of  re- 
tail stores  or  wholesale  houses  must  also  be  made  the 
subject  of  careful  study.  In  our  larger  cities  the 
wholesale  and  retail  districts  are  usually  quite  dis- 
tinct. The  wholesale  district  is,  as  a  rule,  located 
with  due  regard  to  the  location  of  water  and  railroad 


2l6  BUSINESS     ORGANIZATION 

terminals.  Such  sites  are  frequently  undesirable  for 
retail  or  residential  districts  because  of  the  noise  and 
the  large  amount  of  trucking  which  prevents  the 
development  of  other  kinds  of  traf^fic,  slows  down  the 
street  car  service,  and  keeps  the  pavements  in 
poor  shape. 

Around  these  wholesale  districts  many  subsidiary 
concerns  spring  up.  Here  we  find  banks,  freight- 
forwarders,  steamship,  railroad,  and  insurance  offices; 
all  representing  necessary  functions  in  the  passing  of 
goods  from  manufacturer  to  wholesaler  and  from 
wholesaler  to  retailer. 

There  are  usually  two  different  types  of  retail  dis- 
tricts. One  or  more  main  shopping  sections  located 
near  the  center  of  the  city  and  close  to  the  wholesale 
district,  and  a  large  number  of  small  retail  centers 
located  conveniently  to  the  principal  residential  dis- 
tricts. 

In  New  York  City  the  various  districts  are  quite 
easily  recognized.  The  shipping  and  financial  dis- 
trict occupies  lower  Manhattan.  Then  traveling 
along  the  island,  one  passes  through  the  wholesale 
'  district  and  finally  into  the  main  shopping  centers  on 
Fifth  Avenue  and  Broadway.  After  the  Central 
Park  region  is  reached  the  retail  district  gradually 
changes  into  a  residential  section.  It  is  interesting 
that  in  a  growing  city  these  districts  always  encroach 
upon  each  other.    As  the  wholesale  district  grows  it 


BUSINESS     ORGANIZATION  217 

drives  out  the  retail  stores,  while  the  residential  sec- 
tions carry  on  a  losing  struggle  against  invasion  by 
the  retail  stores. 

The  Retail  Store  Location.  The  first  step  in  deter- 
mining where  to  locate  a  retail  store  is  to  analyze  the 
market  for  the  products  to  be  handled,  and  to  decide 
whether  conditions  of  demand  and  competition  will 
allow  a  new  store  to  enter  the  field.  The  methods 
which  may  be  followed  to  ascertain  this  will  be  de- 
scribed in  the  chapter  on  selling. 

Once  the  city  or  town  has  been  chosen,  it  remains 
to  decide  what  location  shall  be  picked  within  the 
town.  Many  stores  are  located  in  a  somewhat  hap- 
hazard fashion.  Large  chain  stores,  such  as  the 
Woolworth  ten-cent  stores  and  the  cigar  stores  of  the 
United  Cigar  Stores  Company,  are  located  only  after 
a  careful  study  has  [been  made  of  all  available  sites. 

Certain  definite  principles  must  here  be  borne  in 
mind: 

I.  It  is  usually  advantageous  to  locate  near  other  stores 
of  the  same  kind.  At  first  thought  this  may  seem 
unreasonable  since  the  new  store  would  then  be 
opened  in  the  midst  of  keen  competition,  but  experi- 
ence shows  that  shoppers  when  in  search  of  an 
article  visit  the  section  of  the  retail  district  where 
stores  are  found  which  handle  it.  Stores  outside  this 
section  must  make  special  outlays  in  advertising  to 
attract  that  trade.  Larger  cities  have  their  furni- 
ture stores,  automobile  salesrooms,  and  dry  goods 


j2i8  business    organization 

stores  each  grouped  in  fairly  well-defined  sections 
of  the  retail  district. 

2.  Complementary  articles  are  best  grouped  together.  A 

new  suit  necessitates  a  new  hat  and  frequently  new 
shoes.  Where  such  articles  are  sold  in  different 
stores  they  not  uncommonly  seek  the  same  street 
and  the  same  side  of  the  street. 

3.  The  sides  of  the  street  become  specialized.    As  stores 

which  deal  principally  or  solely  in  articles  that 
appeal  to  women  group  themselves  together,  they 
will  gradually  force  the  men's  stores  to  another 
block,  or  another  side  of  the  street.  Any  women's 
store  located  on  the  men's  side  will  find  it  advan- 
tageous to  change  its  location,  since  women  do  not 
like  to  pass  a  long  line  of  cigar  stores,  men's  fur- 
nishing stores,  pool  rooms,  and  saloons  when  on  a 
shopping  trip.  Although  this  kind  of  specialization 
is  not  always  so  clearly  noticeable,  the  tendency  in 
that  respect  may  be  observed  in  most  retail  centers. 

4.  Anything  that  makes  walking  along  the  sidewalks  un- 

comfortable will  interfere  with  business.  Slippery 
sidewalks,  walks  that  are  in  bad  repair,  iron-covered 
cellar  openings,  all  drive  customers  away,  for  they 
will  either  avoid  that  sidewalk  altogether  and 
choose  the  other  side  of  the  street,  or  they  will  walk 
along  the  outer  edge,  watching  their  steps  instead 
of  looking  at  the  window  display.  In  the  southern 
states,  the  side  of  the  street  which  is  all  day  long 
exposed  to  the  hot  sun  is  not  popular,  a  fact  which 
even  a  liberal  use  of  awnings  and  balconies  cannot 
entirely  ofi^set.    Dangerous  crossings  will  cause  cus- 


BUSINESS     ORGANIZATION  219 

tomers  to  avoid  the  sidewalk;  blank  walls  which 
contrast  with  the  gay  and  lighted  windows  at  the 
other  side  of  the  street  will  have  the  same  effect,  for 
people  are  like  moths;  they  go  where  the  bright 
light  shines. 
5.  Though  a  crowded  street  is  more  likely  to  be  a  good 
retail  street  than  a  deserted  one,  the  number  of 
passers  by  means  little  in  itself;  they  must  be  in 
the  buying  mood.  The  corners  near  the  elevated 
stations  in  Chicago  are  highly  desirable  because 
many  persons  pass  there  every  hour  of  the  day. 
But  such  locations  are  only  suitable  for  certain  kinds 
of  trade.  People  about  to  take  a  subway  or  ele- 
vated train  are  usually  not  in  a  buying  mood.  They 
are  in  a  hurry  to  reach  their  work  or  in  a  hurry  to 
get  home.  Only  articles  which  are  bought  on  sud- 
den impulse,  or  as  a  last  thought  before  taking  a  car 
are  logically  suited  for  such  a  location.  Candy 
stores,  flower  booths,  cigar  stores,  and  drug  stores 
are  especially  adapted. 

A  store  which  expects  to  sell  goods  to  men  must 
locate  where  the  largest  number  of  men  of  the  social 
class  to  whom  the  articles  appeal  pass  at  the  right 
time  of  the  day.  A  street  frequented  by  working 
people  on  Saturday  afternoon  and  evening  is  a 
better  street  to  locate  a  store  of  cheap  jewelry  and 
working  clothes  than  a  street  where  a  large  number 
of  workingmen  pass  on  their  way  to  work. 

A  careful  study  of  the  various  factors  which  in- 
fluence the  value  of  locations  may  sometimes  lead  to 


220  BUSINESS     ORGANIZATION 

surprising  results.  Many  sites  are  in  bad  repute 
only  because  the  right  kind  of  store  has  not  located 
there,  and  may  consequently  be  obtained  at  a  rela- 
tively low  figure,  by  the  owner  of  a  store  for  which 
that  location  is  admirably  suited. 

Summary.  Before  locating  a  business  establish- 
ment a  careful  study  should  be  made  of  the  site.  In 
the  case  of  a  factory,  nearness  to  raw  materials,  to 
labor,  power,  and  to  the  selling  market  must  all  be 
considered.  For  some  kinds  of  factories  a  country 
location  may  be  desirable.  The  small  plant  depend- 
ing upon  other  industries  and  not  able  to  attract  its 
labor  readily  does  better  to  locate  in  the  city. 

Wholesale  and  retail  establishments  must  also  con- 
sider their  locations  carefully.  The  wholesaler  will 
locate  advantageously  near  other  wholesale  concerns 
which  usually  are  grouped  around  the  rail  and  water 
terminals  where  banks,  express  offices,  and  other  sub- 
sidiary concerns  are  also  congregated. 

The  retail  store  must  be  located  principally  with 
regard  to  the  habits  of  the  kind  of  public  it  hopes  to 
attract.  All  factors  which  might  enter  in  to  drive 
the  desired  trade  away  from  the  chosen  location  must 
be  carefully  analyzed. 

REFERENCES 

The  same  as  those  of  the  preceding  chapters.  Additional 

reference : 
J.    R.   Smith.      Industrial  and    Commercial   Geography. 

Henry  Holt  and  Company. 


BUSINESS     ORGANIZATION  221 

QUESTIONS  FOR  FURTHER  STUDY 

1.  Give  some  examples  of  industries  in  your  home 
state  which  are  located  near  the  source  of  raw  material, 
and  consider  whether  it  would  be  desirable  to  move  these 
industries  closer  to  the  market  of  finished  goods. 

2.  Study  an  assembling  industry  in  your  city  or  town 
and  find  out  where  the  products  which  are  combined 
in  the  finished  article  come  from. 

An  interesting  way  of  presenting  the  situation  is  to 
take  a  large  map  of  the  United  States  and  to  connect  the 
location  of  such  an  industry  with  the  sources  of  supply  by 
means  of  lines  drawn  in  red  ink.  Then  find  out  what  the 
farthest  points  are  to  which  its  finished  product  is 
shipped  and  connect  them  with  a  set  of  lines  which 
completely  encircle  the  city.  This  irregularly  shaped 
area  is  the  market  territory. 

3.  Can  you  see  any  danger  in  locating  a  factory  near 
an  oil  well  just  because  this  will  give  you  cheap  power 
and  to  ignore  many  other  important  factors?  Can  you 
discover  any  reason  for  the  fact  that  the  carborundum 
plants  are  grouped  around  Niagara  Falls;  that  many 
wood-pulp  mills  are  operated  in  Vermont  or  Massa- 
chusetts; that  Pittsburgh  is  a  center  of  the  iron  industry? 

In  order  to  answer  these  questions  you  must  look  up 
in  some  encyclopedia,  magazine  article,  or  government 
report  the  facts  about  these  industries  so  that  you  may 
understand  what  raw  materials  are  used  and  what  other 
requirements  the  location  must  satisfy. 

Reference:   Smith.    Chapters  X,  XI. 


222  BUSINESS     ORGANIZATION 

TEST  QUESTIONS 

1.  How  would  you  decide  whether  your  town  is  a 
good  place  to  locate  a  furniture  factory?  Give  a  complete 
statement  of  all  the  information  that  you  will  need  in 
order  to  answer  that  question  intelligently. 

2.  What  information  would  you  need  in  order  to 
answer  the  question  whether  it  is  better  to  locate  in  the 
city  or  in  the  country? 

3.  What  is  your  city  doing  to  attract  new  industries? 

4.  How  would  you  determine  the  best  location  in  your 
town  for  a  very  expensive  restaurant? 


BUSINESS     ORGANIZATION  223 


CHAPTER   XI 

PLANNING  THE  BUILDING 

A  Poor  Building  Means  High  Cost.  It  costs  money 
to  build  a  factory  and  to  keep  it  in  repair,  and  it 
costs  money  to  operate  it.  The  object  of  all  manage- 
ment is  to  obtain  the  largest  results  with  these  out- 
lays. That  means  that  once  the  concern  has  in- 
vested in  equipment  the  most  complete  use  must  be 
made  of  it  during  its  lifetime.  Every  hour  of  idle 
time,  every  square  foot  of  idle  space,  means  money 
wasted.  This  principle  holds  true  in  factory,  store- 
room, office,  or  retail  store. 

The  Factory  Layout.  We  shall  first  study  the  fac- 
tory. Before  deciding  how  to  build  a  factory  or  how 
to  arrange  the  various  machines  in  respect  to  each 
other,  it  is  necessary  to  form  a  very  clear  picture  of 
what  the  factory  is  supposed  to  do,  what  processes 
will  have  to  be  housed  in  the  building,  what  the  rela- 
tion is  of  these  processes  to  each  other.  It  is  neces- 
sary, therefore,  as  a  first  step,  to  analyze  the  work. 

Once  we  know  the  processes  and  the  order  in  which 
they  follow  each  other,  we  can  lay  out  the  factory  on 
paper.  The  building  becomes  then  little  more  than 
a  shell,  a  roof  to  keep  off  the  rain.  This  way  of 
planning  a  factory  is  quite  different  from  construct- 


224  BUSINESS     ORGANIZATION 

ing  a  building  first  and  then  trying  to  fit  machinery 
inside.  This  last  method  often  leads  to  very  poor 
results. 

The  Various  Types  of  Factories.  Some  factories  are 
very  simple  indeed.  Take  a  planing  mill.  The  rough 
boards  as  they  are  received  from  the  lumber  mill 
enter  at  one  end  of  the  plant  and  the  planed  boards 
come  out  at  the  other  end.  This  type  of  manufac- 
turing process  has  been  called  simple  sequence.  There 
are  no  by-products  except  a  small  amount  of  waste, 
neither  does  any  combination  of  materials  take  place. 

The  processes  are  a  little  more  involved  in  the  case 
of  a  factory  which  takes  the  raw  products  of  nature 
and  splits  them  up  into  their  component  parts.  A 
flour  mill  does  this.  The  wheat  is  graded  and  cleaned, 
after  which  poor  wheat  and  trash  are  separated  from 
the  good  wheat.  The  wheat  is  then  ground  and  the 
chaff  separated  from  the  flour. 

Much  more  involved  is  a  smelter  which  takes  the 
ore  as  it  comes  from  the  mine  and  by  mechanical  and 
chemical  processes  divides  it  up  into  some  score  of 
different  products.  A  packing  plant  is  another  ex- 
ample :  the  cow  or  pig  goes  in  at  one  end  and  from 
the  other  end  of  the  factory  different  cuts  of  meat 
and  a  long  list  of  by-products — glue,  fertilizer,  soap, 
and  buttons — pass  on  to  the  consumer. 

Such  manufacturing  processes  have  been  called 
analytic.  They  analyze  the  raw  material,  i.  e.,  divide 
it  into  its  component  parts.    A  chart  of  the  processes 


BUSINESS     ORGANIZATION 


225 


in  such  a  factory  looks  very  much  Hke  a  pyramid. 
One  simple  raw  product  stands  at  the  top  and  an 
increasing  number  of  finished  and  by-products  de- 
velop as  the  bottom  is  approached. 

Such  a  chart  of  processes  is  called  diflow  sheet.   Here 
is  an  example : 


ZINC  ORE 

READY  TO 

WORK 


J  CRUSHER  I 

Z^ 1  COLLI 


SCREENINGS  j 


SEPARATOR 

FOR 
COARSE  ORE 


IRON  ORE 

WITH 
SOME  ZINC 


HALF  &. 
HALF 


ZINC 
OXIDE 


1 1    ^'^^ 


COLLECTrON 

OF 

DUST 


SEPARATOR 

rOR 

FINE  ORE 


ZINC  ORE 

READY  TO 

WORK 


MANUrAC- 

TURING 
PROCESS 


IRON  ORE 

WITH 
SOME  ZINC 


ZINC 
OXIDE 


FLOW  SHEET  OF  THE  FRANKLIN  MINE 


HALF  & 
HALF 


This  is  a  very  simple  flow  sheet,  for  the  ore  pro- 
duced by  this  mine  consists  almost  wholly  of  zinc 
and  iron  ore,  which  are  easily  separated  after  being 
crushed  and  do  not  give  rise'^to  many  by-products. 
A  flow  sheet  of  another  smelter,  the  Balbach  Smelt- 
ing Works  in  Newark,  New  Jersey,  shows  a  much 
more  involved  situation.  Here  ore  from  various 
sources  is  smelted  and  refined,  resulting  in  an  output 
of  arsenic,  antimony,  lead,  lead-oxide,  silver,  and 
gold. 


226  BUSINESS     ORGANIZATION 

The  Assembling  Industries,  In  an  assembling  in- 
dustry the  flow  sheet  looks  quite  different,  looks,  in 
fact,  like  an  inverted  triangle.  At  the  top  of  the 
sheet  a  large  number  of  products,  usually  the  finished 
or  partly  finished  products  of  other  industries,  ap- 
pear, and  at  the  bottom  of  the  sheet  is  the  finishecf 
product  of  which  they  have  become  a  part.  This 
assembling  may  take  place  in  one  assembling  room 
in  the  factory,  the  component  parts  being  brought 
to  this  room.  This  has  been  called  stationary  assem- 
bling. In  other  factories  another  method  called 
progressive  assembling  is  found. 

The  Ford  process  of  assembling  is  called  progres- 
sive assembling  because  the  chassis  travels  upon  a 
rail  and  is  carried  along  at  a  constant  rate  of  speed 
from  one  production  center  to  the  next — progresses 
from  bare  chassis  to  finished  car. 

The  Production  Centers.  The  object  of  such  an 
analysis  of  processes  is  to  determine  clearly  the  char- 
acter and  order  of  the  various  processes.  Each 
process  through  which  the  goods  pass  will  necessitate 
some  kind  of  machinery  and  some  floor  space  where 
the  processes  are  to  take  place.  The  factory  may, 
therefore,  be  subdivided  into  a  number  of  smaller 
factories,  as  it  were,  in  each  of  which  one  process  is 
housed.  Such  small  units  are  called  production  cen- 
ters. We  are  now  ready  to  determine  the  following 
questions : 
I.    How  much  space  must  be  allowed  for  each  center? 


i 

'-  i  *  ^  ^  *  »U   * '|^%  ^'"       ; ,:  -■ "' '' 

JgPt 

' '  m^^^^^k                  -T-^sl?-    .  «  ^^  -^  ^i^^^* 

be 

a 


228  BUSINESS     ORGANIZATION 

2.  How  must  these  centers  be  arranged  to  secure  efficient 

operation? 

3.  How  must  the  products  pass  from  one  center  to 

another? 

The  first  question  can  only  be  answered  by  some- 
one experienced  in  the  industry  or  familiar  with  the 
kind  of  machinery  which  constitutes  the  production 
center.  The  firm  which  supplies  this  machinery  will 
frequently  be  able  to  give  this  information. 

It  is  extremely  important  that  the  productive 
capacity  of  each  center  be  properly  adjusted  with 
reference  to  that  of  all  others.  Take  the  example  of 
the  flow  sheet  of  the  Franklin  mine.  Suppose  that 
the  fine  crusher  is  so  large  that  it  can  handle  the  ore 
twice  as  fast  as  the  coarse  crusher  can  work  it.  In 
that  case  the  fine  crusher  will  be  idle  half  the  time 
while  waiting  for  material.  If,  on  the  other  hand, 
it  cannot  work  the  ore  as  fast  as  the  coarse  crusher 
can  feed  it  then  there  will  be  a  piling  up  of  material 
at  the  fine  crusher.  Production  centers  must,  there- 
fore, be  arranged  so  as  to  permit  the  material  to  flow 
through  steadily  without  congestion  or  without  in- 
volving idle  machinery.  From  the  point  of  view  of 
management  this  uninterrupted  flow  of  work  is  im- 
portant in  that  it  sets  a  pace  for  the  workmen  in  the 
different  work  centers,  and  makes  it  easy  to  detect 
"soldiering." 

A  good  way  to  study  the  best  arrangement  of  the 
production  centers  is  to  cut  small  pieces  of  card- 


BUSINESS     ORGANIZATION  229 

board,  each  representing  a  production  center.  These 
pieces  may  bear  a  picture  of  the  machine  or  bench 
and  should  be  carefully  cut  to  scale.  Many  managers 
have  every  machine  and  workbench  represented  in 
this  way  upon  a  floor  plan  of  the  factory.  By  mov- 
ing these  pieces  about  upon  the  floor  plan,  the  dif- 
ferent possible  combinations  may  be  tried  out  until 
the  most  efficient  one  is  discovered.  The  machines 
themselves  are  not  touched  until  the  layout  has  been 
determined  upon.  Sometimes  cards  of  a  different 
color  are  placed  upon  the  plan  to  reserve  space  for 
machines  to  be  purchased  in  the  future. 

Transportation  in  the  Factory,  A  very  important 
question  is  how  to  connect  these  various  production 
centers.  Theoretically,  of  course,  the  goods  must 
pass  with  a  minimum  delay  and  a  minimum  cost 
from  one  production  center  to  anoth^.  This  in- 
volves some  kind  of  transportation  service.  In  an 
analytical  industry  this  problem  is  usually  not  very 
difficult.  Most  of  the  material  flows.  In  a  flour  mill 
the  wheat  is  started  at  the  top  of  the  mill,  and  flows 
through  the  various  machines  by  gravity.  If  one 
trip  through  the  mill  is  not  sufficient,  it  may  be 
started  again  from  the  top.  A  belt  with  small 
buckets  lifts  the  material  to  the  top  of  the  building. 
Where  horizontal  transportation  is  needed,  "screw 
conveyors"  or  'Tiorizontal  belt  conveyors"  may  be 
used.  It  is  a  simple  matter  to  regulate  the  speed  of 
all  these  conveyors  so  that  no  congestion  occurs  any- 


230  BUSINESS     ORGANIZATION 

where  along  the  line,  and  the  whole  journey  may  be 
completed  without  necessitating  rehandling. 

In  an  assembling  industry  the  transportation  prob- 
lem is  more  difficult.  It  would  not  do  to  hoist  the 
parts  of  a  motor  car  to  the  top  of  the  building  and  to 
let  them  slide  down  by  gravity.  The  component 
parts  are  of  varying  sizes  and  weights,  and  usually 
require  a  great  deal  of  rehandling.  Here  trucks,  or 
in  case  of  very  heavy  articles,  cranes  may  be  indis- 
pensable, though  in  some  few  machine  factories  belt 
conveyors  are  used  with  success. 

When  trucks  are  used  the  problem  of  moving  them 
from  one  floor  to  another  presents  itself.  Elevators 
are  always  expensive,  are  likely  to  get  out  of  order, 
and  are  time  consuming.  It  has  been  calculated 
that  an  elevator  will  rise  fifteen  feet,  or  one  story,  in 
the  same  time  that  a  truck  travels  one  hundred  feet 
on  the  level ;  two  stories  while  the  truck  travels  one 
hundred  and  fifty  feet;  and  three  stories  while  the 
truck  moves  two  hundred  feet. 

Frequent  traveling  between  floors  is,  therefore,  un- 
economical. In  many  factories  elevators  have  been 
completely  eliminated,  and  inclined  roads  allow  the 
truck  to  travel  from  floor  to  floor.  These  trucks 
should  be  so  built  that  all  material  may  be  moved  on 
or  off  the  truck  with  the  minimum  amount  of  lifting. 
That  saves  labor  and  time.  Sometimes  this  may 
mean  a  low  truck  and  at  other  times  it  may  mean  a 
liigh  truck.    This  depends  upon  how  the  material  is 


232  BUSINESS     ORGANIZATION 

needed  at  the  various  machines.  Too  little  attention 
is  paid  to  this  feature  and  highly  paid,  skilled  work- 
men spend  a  good  part  of  their  time  lifting  the 
articles  from  or  onto  the  truck. 

In  order  to  limit  the  investment  in  trucks  to  the 
lowest  figure  they  should  not  be  allowed  to  stand 
idle.  Some  factories,  anxious  to  secure  maximum 
efficiency,  place  the  care  of  trucks  in  the  hands  of  a 
sepeu-ate  department  which  operates  the  trucks  like 
a  railroad  system.  In  every  production  center  a 
time-table  is  hung  showing  when  trucks  will  pass  by. 
At  the  Willys-Overland  factory  at  Toledo,  and  at 
many  other  automobile  factories,  such  regular  truck 
service  is  maintained. 

Usually  every  production  center  will  have  its  own 
set  of  trucks  which  are  loaded  as  the  work  progresses, 
to  be  picked  up  by  the  truck  train.  Such  truck 
trains  are  pulled  by  a  small  electric  or  gasoline  en- 
gine. This  type  of  equipment  is  obviously  only 
possible  when  trucks  are  used  on  a  large  scale  and 
are  constantly  on  the  move.  Where  trucks  are  used 
only  occasionally,  hand  trucks  of  moderate  size  are 
to  be  preferred.  Trucks  are  always  relatively  ex- 
pensive. A  good  way  to  have  all  the  advantages  of 
trucks,  but  to  avoid  the  expense  of  maintaining  a 
large  number  of  idle  trucks,  is  to  have  at  each  pro- 
duction center  loading  platforms  where  the  finished 
articles  are  accumulated.  As  soon  as  the  platform  is 
loaded  a  small  elevator  truck  is  shoved  under  the 


BUSINESS      ORGANIZATION  233 

platform,  a  lever  lifts  the  platform  off  the  ground, 
ana  it  can  then  be  wheeled  away  to  be  deposited  else- 
where.   This  is  a  common  method  of  saving  expense. 

Large  department  stores  and  wholesale  firms  suc- 
ceed in  making  great  savings  in  outside  delivery  ex- 
pense by  the  use  of  trailers.  These  are  trucks  with- 
out engines,  which  are  inexpensive,  and  when  loaded 
are  picked  up  by  the  tractor.  The  most  expensive 
part  of  the  trucks,  the  power  unit,  is  thereby  kept  at 
work  continually  and  so  is  the  driver,  who  usually 
receives  fairly  high  wages. 

Other  Considerations.  The  internal  arrangement  of 
the  plant  is,  therefore,  determined  upon  the  basis  of 
maximum  efficiency  in  operation.  Frequently,  how- 
ever, it  is  necessary  to  look  further  ahead  and  to  lay 
out  the  plans  with  due  regard  to  future  enlargements. 
Proper  planning  of  internal  arrangements  will  make 
it  possible  for  the  architect  to  place  the  heaviest  con- 
struction where  it  is  needed,  to  secure  saving  where 
possible,  and  to  provide  for  ample  light  wherever  this 
is  essential. 

After  the  production  centers  have  been  properly 
laid  out  it  is  necessary  to  find  the  most  efficient  loca- 
tion for  tool  rooms,  stock  rooms,  power  plants,  offices, 
drafting  rooms,  elevator  shafts,  fire  escapes,  service 
stations,  and  a  multitude  of  subsidiaries  of  a  manu- 
facturing establishment.  In  locating  them,  consider- 
ations similar  to  those  which  determine  the  location 
of  production  centers  serve  as  guides. 


234  BUSINESS     ORGANIZATION 

The  Building  Itself,  Great  changes  have  recently 
been  made  in  factory  construction,  the  old  frame 
building  is  universally  considered  out  of  date.  It  is 
cheap  to  build,  but  presents  great  danger  to  life  and 
property  from  fire,  and  is  not  desirable  for  large 
plants  nor  for  buildings  of  more  than  two  stories. 
The  slow-burning  type  of  building  is  merely  of  heav- 
ier construction  with  a  few  changes  in  details  which 
offer  a  certain  degree  of  protection  against  fire. 
Many  modem  buildings  are  built  of  steel  frame,  while 
the  walls  built  of  tile  or  brick  do  not  really  carry  the 
building.  Such  structures  are  very  expensive  but  are 
often  desirable  where  heavy  beams  are  needed  to 
support  machinery,  cranes,  or  shafts.  A  fourth  type 
of  construction,  the  re-enforced  concrete  building,  is 
becoming  more  and  more  common.  The  advan- 
tages of  these  last  two  methods  of  construction  are 
the  virtual  elimination  of  fire  dcmger,  the  generous 
free  space  in  the  walls,  which  allows  for  large  win- 
dows, thereby  insuring  light  and  air;  and  the  rela- 
tively low  upkeep. 

Where  land  is  cheap,  one-story  buildings  may  fre- 
quently prove  most  efficient.  They  are  cheap  and 
safe,  afford  unusually  good  opportunity  for  lighting, 
especially  by  means  of  the  saw-tooth  roof,  and  they 
allow  horizontal  and  straight  line  transportation  be- 
tween production  centers. 

Planning  the  Retail  Store,  The  retail  store  faces 
problems  essentially  of  the  same  character  as  the 


BUSINESS     ORGANIZATION  235 

factory.  Here,  too,  It  is  necessary  to  make  the  most 
complete  use  of  the  available  floor  space.  As  a 
matter  of  fact,  the  question  is  of  even  greater  weight 
in  the  case  of  a  store,  since  floor  space  is  usually  more 
expensive  there  than  in  a  factory  located  in  the  out- 
skirts of  the  city. 

The  store  should,  therefore,  be  planned  to  make 
each  square  foot  of  floor  space  as  effective  as  possible. 
The  store  manager  faces  a  difficult  problem.  He 
must  study  the  desires  and  habits  of  his  customers 
and  must  take  into  account  the  effect  of  his  arrange- 
ment of  the  store  upon  its  general  appearance  and 
attractiveness. 

Customers,  as  a  rule,  dislike  to  climb  stairs  or  to 
crowd  into  elevators.  They  especially  dislike  going 
down  below  the  street  level.  The  store  manager 
must,  therefore,  lay  out  his  store  so  that  goods  to 
which  he  is  anxious  to  attract  attention  are  placed 
where  buyers  will  go  naturally.  The  less  desirable 
places  he  must  then  utilize  for  articles  which  have  a 
special  attraction  for  customers  or  which  are  never 
bought  in  a  hurry. 

The  bargain  basement  is  a  logical  outcome  of  this 
consideration.  People  hunting  bargains  do  not  mind 
going  to  the  basement  for  them.  Those  who  are  out 
to  buy  an  expensive  rug  or  a  dining  room  set — a 
purchase  one  makes  hardly  ever  more  often  than 
once  in  a  lifetime — ^are  quite  willing  to  go  to  the 
fourth  and  fifth  story  to  find  them. 


236  BUSINESS     ORGANIZATION 

It  is  different  with  men's  clothing.  Men  do  not 
like  to  shop.  They  consider  the  time  spent  in  shop- 
ping wasted  time,  and  they  resent  it  when  they  are 
sent  from  one  end  of  the  store  to  another  or  have  to 
travel  to  some  other  floor  to  find  what  they  seek. 
The  same  thing  is  true  of  women  looking  for  such 
items  as  gloves,  laces,  ribbons,  and  buttons.  If  they 
have  to  go  to  much  trouble  to  get  to  the  proper 
counter,  they  will  frequently  rather  go  to  some  other 
store.  With  hats,  suits,  and  dresses  it  is  different. 
Women  will  spend  whole  days  comparing  models  and 
prices  before  they  make  their  selection,  and  they  do 
not  mind  a  trip  in  the  elevator  to  arrive  at  the  depart- 
ment where  the  goods  are  sold. 

Another  important  factor  which  determines  the 
location  of  departments  in  a  large  store,  is  the  fact 
that  some  goods  suggest  the  need  of  other  goods.  It 
is  always  advisable  to  display  such  complementary 
goods  together.  Silver  cigarette  cases  may  be  dis- 
played in  the  silver  goods  department,  but  it  would 
be  a  mistake  not  to  display  them  also  near  the  place 
where  the  cigars  and  cigarettes  are  sold.  These  in 
turn  are  most  advantageously  located  near  the  men*s 
wearing  apparel ;  in  that  part  of  the  store  where  men 
are  most  likely  to  go. 

Specialties  and  notions  for  which  the  demand  has 
to  be  cultivated,  such  as  a  new  model  of  some  com- 
monly used  article,  often  are  displayed  to  advantage 
not  in  the  department  in  which  they  logically  belong, 


BUSINESS     ORGANIZATION  2^7 


but  where  the  largest  number  of  customers  to  which 
the  article  appeals  pass  by.  For  the  same  reason  it 
is  wise  to  place  articles  for  which  a  customer  will 
walk  across  the  store,  at  the  farther  end,  thereby  af- 
fording other  goods  the  opportunity  to  catch  his  eye 
as  he  passes. 

The  Retail  Building,  The  retail  store  building  must 
satisfy  many  of  the  requirements  demanded  of  a  fac- 
tory building  and  many  others  in  addition.  Good 
light,  heat,  ventilation,  properly  placed  service  de- 
partments, elevators,  and  stairs,  protection  against 
fire — these  are  necessary  factors  in  both  types  of 
buildings.  But  the  retail  store  must  not  only  be  a 
good  place  in  which  to  work — it  must  be  made 
attractive  to  the  customer.  A  dark  store  repels 
customers  and  is  a  poor  place  to  display  and  sell  any- 
thing that  needs  to  be  inspected.  By  the  use  of  a 
light  finish,  the  interior  of  a  building  may  be  made 
cheerful  and  the  amount  of  reflected  light  increased. 

The  front  of  the  building  must  receive  careful 
attention.  It  must  always  be  remembered  that  the 
frontage  was  paid  for  and  that  the  most  effective  use 
must  be  made  of  the  display  possibilities  of  this 
frontage.  Anything  which  interferes  with  this  means 
a  loss  to  the  concern.  Massive  columns,  unneces- 
sarily large  entrances,  and  blank  walls  all  mean 
frontage  wasted.  For  the  same  reason  everything 
should  be  done  to  induce  the  crowd  to  pass  by  the 
windows. 


238  BUSINESS     ORGANIZATION 

Comfortable,  well-kept,  and  unobstructed  side- 
walks, safe  and  clear  crossings,  generous  awnings 
which  protect  against  rain  and  sun,  and  well-lighted 
window  displays  are  all  potent  factors  in  attracting 
trade.  The  modem  store  building,  save  for  orna- 
mental features,  is  being  built  along  lines  not  so 
very  different  from  those  of  the  modem  factory 
plants. 

There  is  disagreement  in  regard  to  whether  eleva- 
tors, inclined  walks,  or  moving  staircases  are  the  best 
adapted  to  the  use  of  stores.  It  seems  that  a  good, 
spacious  elevator  is  to  be  preferred.  The  arguments 
against  the  other  means  of  traveling  are  that  an  in- 
clined walk  is  too  fatiguing  for  customers,  and  the 
moving  staircase  requires  a  certain  amount  of  skill 
of  its  passengers.  Women  frequently  dislike  them  for 
fear  that  they  may  not  move  gracefully  when  board- 
ing or  leaving  the  stairs. 

Where  elevators  are  used,  prompt  service  Is  essen- 
tial. In  large  stores  this  is  obtained  by  the  use  of  a 
dispatcher  who  at  the  same  time  acts  as  a  store  guide. 
By  the  use  of  local  and  express  elevators,  otherwise 
unpopular  floors  may  be  opened  up.  Especially 
when  the  top  floor  is  used  for  a  restaurant,  a  special 
elevator  for  its  patrons  is  indispensable.  Some  large 
department  stores  divide  their  elevators  into  large 
groups,  one  for  up  and  the  other  for  down  service. 
This  makes  a  quick  return  trip  possible  and  lessens 
the  likelihood  of  congestion. 


BUSINESS     ORGANIZATION  239 

The  Receiving  and  Shipping  Rooms.  The  location 
of  the  receiving  and  shipping  rooms  is  a  much  more 
difficult  problem  to  solve  in  the  retail  store  than  in 
the  factory.  In  the  case  of  the  factory  the  position 
of  the  railroad  siding,  or  of  the  best-paved  road  are  the 
determining  factors.  The  retail  store  usually  faces 
the  choice  between  the  use  of  some  back  alley,  which 
is  easily  blocked  and  used  for  many  other  purposes, 
or  the  sacrifice  of  a  part  of  the  expensive  frontage 
and  the  obstruction  of  the  sidewalk.  It  is  a  fact  that 
even  large  stores,  carefully  planned  in  every  other 
respect,  have  failed  to  give  due  attention  to  receiving 
and  shipping.  This  usually  results  in  a  poorly  kept 
storeroom,  which  again  results  in  high  costs  and  un- 
expected losses. 

Not  a  few  large  department  stores  have  taken  he- 
roic measures  to  solve  this  problem,  and  have  pro- 
vided for  a  wide  alley  leading  through  the  center  of 
the  building  with  outlets  at  the  least  desirable 
frontage.  In  Chicago  and  New  York  examples  may 
be  seen  in  the  largest  and  best-known  department 
stores. 

Planning  the  Office.  Few  offices  are  carefully  laid 
out,  and  as  a  result  much  unnecessary  walking  around 
slows  down  the  work  of  the  office.  To  lay  out  an 
office  properly  the  same  method  may  be  followed  as 
is  used  in  laying  out  a  factory.  The  desks  are  pro- 
duction centers,  and  should  be  arranged  in  such 
order  that  documents  and  papers  may  travel  upon 


BUSINESS      ORGANIZATION  24I 

their  customary  journeys  along  straight  Hnes  with  a 
minimum  of  delay  and  congestion. 

As  far  as  working  conditions  are  concerned  more 
even  than  in  a  factory,  good  light  is  essential.  It  is 
also  necessary  to  eliminate  all  unnecessary  noise. 
Wooden  floors  and  noisy  office  machinery  should  be 
avoided.  Where  appliances  such  as  adding  machines, 
typewriters,  comptometers,  and  addressographs  are 
needed,  it  is  best  to  place  them  all  in  a  special  room 
and  to  separate  this  room  from  the  executive  and 
accounting  offices  by  means  of  partitions.  Glass  par- 
titions are  to  be  preferred  to  solid  ones  since  they 
close  out  dust  and  noise  but  do  not  interfere  with  the 
light.  It  is  also  conducive  to  better  work  if  no  office, 
whether  occupied  by  executives  or  stenographers,  has 
too  much  privacy.  Not  many  employees  like  to  be 
caught  napping.  An  unobstructed  view  of  the  entire 
office  force,  moreover,  makes  an  impression  of  great 
activity  upon  visitors  and  looks  cheerful  and  hos- 
pitable. 

Summary.  We  have  studied  the  method  of  plan- 
ning a  building.  First,  the  processes  are  analyzed  in 
production  centers.  Various  types  of  factories  are 
here  discovered  to  exist:  simple  sequence,  analytical, 
and  assembling.  The  next  problem  is  to  correlate 
these  centers,  to  place  them  in  their  proper  location, 
and  to  connect  them  by  means  of  the  most  efficient 
transportation  methods.  The  choice  between  differ- 
ent conveyors  and  trucks  must  here  be  made.    The 


242  BUSINESS     ORGANIZATION 

building  itself  is  a  mere  shell,  and  must  be  so  planned 
as  to  cause  a  minimum  of  interference  with  the  ideal 
layout.  Light,  heat,  and  air  are  the  factors  which 
must  determine  in  the  long  run  the  success  of  a 
building — also  fire  protection.  The  retail  store  faces 
similar  problems,  but  the  customers  must  here  be 
taken  into  account.  The  location  of  departments 
and  their  relation  to  each  other,  the  use  of  floors  and 
basements,  the  use  of  window  space,  of  elevators,  and 
other  means  of  conveyance  must  all  be  made  the 
subject  of  careful  study  and  analysis.  Nothing  must 
be  left  to  chance  and  guess  work.  The  building  must 
be  so  constructed  that  it  will  be  attractive  to  custo- 
mers, a  good  place  in  which  to  work,  and  that  it  affords 
the  maximum  opportunity  for  sales  display.  A  difhcult 
problem  is  the  location  of  the  receiving  and  shipping 
rooms,  especially  where  a  store  occupies  an  expensive 
site,  for  in  that  case  all  frontages  may  be  of  great 
value. 

REFERENCES 

Same  as  preceding  chapters.    Additional  reference: 

P.  H.  Nystrom.    The  Economics  of  Retailing.    The  Ronald 
Press  Company. 

QUESTIONS  FOR  FURTHER  STUDY 

I.   What  is  meant  by  non-productive  departments  in  a 
store? 

Reference:   Nystrom.    Chapter  X. 


BUSINESS     ORGANIZATION  243 

2.  Where  would  you  locate  the  washrooms  and  clothes 
closets  in  a  factory? 

3.  Visit  some  factory  or  store  and  draw  a  floorplan.  Is 
everything  arranged  in  the  most  efficient  way  or  can 
you  suggest  some  possible  changes? 

4.  What  considerations  should  be  kept  in  mind  when 
planning  the  arrangement  of  the  office? 

References:    Parsons.    Chapter  II. 
Schulze.    Chapter  V. 

TEST  QUESTIONS 

1.  What  is  meant  by  progressive  assembling? 

2.  Explain  why  the  internal  arrangement  of  the  plant 
or  store  is  of  vital  importance. 

3.  Where  would  you  locate  the  shipping  room  in  a 
factory  built  in  the  country,  and  where  would  you  locate 
the  same  room  in  a  store  in  the  center  of  a  large  city? 


244  BUSINESS     ORGANIZATION 


CHAPTER   XII 

PURCHASING 

Careful  Buying  Is  Essential  to  Successful  Selling, 
The  true  importance  of  buying  is  not  infrequently 
overlooked  in  fairly  well-managed  business  concerns, 
and  attention  is  devoted  almost  exclusively  to  pro- 
duction and  selling.  The  type  of  business  where  buy- 
ing is  always  looked  upon  as  important  is  the  whole- 
sale and  retail  business.  Here  the  relation  between 
buying  and  selling  is  clearly  evident.  In  a  manufac- 
turing concern  buying  is  frequently  looked  upon  as  a 
relatively  simple  matter  of  small  importance.  Yet 
there,  too,  intelligent  buying  requires  special  know- 
ledge, while  accurate  information  regarding  the  pro- 
cesses of  production,  and  the  market  for  the  finished 
goods,  is  absolutely  essential. 

Three  Classes  of  Purchases.  There  are  three  classes 
of  articles  which  a  factory  needs  to  purchase.  The 
permanent  equipment,  such  as  large  machines, 
trucks,  and  cars  forms  one  class;  the  raw  material 
and  small  tools  form  a  second  group;  while  office 
supplies  and  equipment  form  a  third.  At  most  large 
plants  where  an  effective  purchasing  department  has 
been  established,  this  office  is  in  charge  of  the  buying 
of  these  three  classes  of  goods.     In  other  plants  the 


BUSINESS     ORGANIZATION  245 

machinery  is  purchased  by  the  engineering  depart- 
ment, while  the  other  requirements  are  suppHed  by 
the  respective  departments.  Centralization  of  pur- 
chasing in  one  office  is  always  to  be  preferred.  Proper 
buying  is  a  specialized  occupation  quite  as  intricate 
as  the  work  of  a  salesman.  No  engineer  would  under- 
take to  sell  his  product  himself,  no  more  should  he 
undertake  the  buying  of  the  equipment  and  raw  ma- 
terials needed  in  his  shop;  moreover,  centralization 
makes  for  greater  standardization.  Though  every- 
thing may  be  carried  to  extremes,  standardization  is 
a  measure  leading  to  economy  and  efficiency. 

That  standardization  makes  for  economy  was  made 
unmistakably  clear  in  the  Great  War.  Before  motor 
transport  equipment  was  standardized,  as  many  as 
thirty  different  sets  of  repair  parts  had  to  be  kept  at 
the  repair  shops.  Every  step  towards  complete 
standardization  means  a  reduction  in  the  money  tied 
up  in  such  parts.  In  an  office,  standardization  is  also 
desirable,  even  in  such  details  as  the  shape  and  size 
of  letter  paper,  the  color  of  the  typewriter  ribbon, 
and  the  size  and  color  of  desk  pads.  There  are 
cases,  however,  where  standardization  would  not 
contribute  to  efficiency.  In  a  factory  where  goods  of 
various  sizes  and  weights  must  be  transported,  it 
would  be  wasteful  to  have  all  trucks  built  as  heavy 
and  strong  as  the  heaviest  and  most  bulky  articles 
would  require. 


246  BUSINESS     ORGANIZATION 

The  Requisition,  The  purchasing  department  does 
buying  only  on  receipt  of  a  "requisition  order."  In 
the  case  of  expensive  machinery,  or  new  or  unusual 
equipment,  such  orders  will,  as  a  rule,  only  be  hon- 
ored if  signed,  not  only  by  the  head  of  the  department 
where  the  order  originates,  but  also  by  some  higher 
executive  officer.  In  the  National  Cash  Register 
Company,  four  signatures  are  needed  on  every  re- 
quisition for  equipment,  the  cost  of  which  exceeds 
$100;  namely,  the  signature  of  the  head  of  the 
department,  of  the  supervisor,  of  the  head  of  the 
division,  and  of  the  chief  engineer. 

Office  supplies,  raw  material,  and  parts  are  also 
ordered  upon  requisition,  but  this  is  more  a  matter 
of  routine.  The  office  requisition  reaches  the  pur- 
chasing agent  from  the  head  of  the  department  con- 
cerned. The  requisition  for  raw  material  is  made  out 
by  the  "store  clerk"  who  is  in  charge  of  the  raw 
material  storeroom,  and  who  makes  requisitions  as 
soon  as  the  need  arises.  Similar  requisitions  originate 
in  the  stock  room  where  parts  and  partly  finished 
goods  are  stored. 

A  typical  store  or  stock  department  requisition  is 
given  below: 


BUSINESS     ORGANIZATION 


247 


STOCK  DEPARTMENT  REQUISITION  ON 
PURCHASING  DEPARTMENT 


Order  No. 


191 


Quantity 


Price 


Description 

Quantity 
in  Stock 

Quantity  Due  on 
Previous  Orders 

Total  Amount  Used 
Past  Six  Months 

0.  K.  Checker 
0.  K.  Price  Clerk 

Remarks 


Buyer's  Instructions:   All  quotations  secured  to  be  entered  on  back  of 
this  copy  and  signed. 


The  form  given  above  is  used  for  ordinary  routine 
requisitions.  The  forms  for  articles  not  carried  in 
stock  can  be  made  substantially  the  same,  except 
that  some  additional  information  would  be  required, 
and  there  would  be  provision  at  the  bottom  for  the 
signature  of  the  proper  officials  who  are  to  pass  upon 
such  unusual  orders. 

Orders  are  numbered  consecutively.  Moreover, 
each  kind  of  article  will  have  its  own  number  by 
which  it  is  known  in  the  stock  room,  accounting,  fac- 


248  BUSINESS     ORGANIZATION 

tory,  and  purchasing  department  records.  Screw 
bolts,  set  screws,  and  nuts  may,  therefore,  be  known 
2.S  135,  375,  and  943,  respectively,  and  each  order 
will  receive  its  own  number  which  will  be  attached 
to  the  item  number.  The  first  order  will  be  01,  and 
the  second  02.  Accordingly,  the  first  order  of  screw 
bolts  will  be  known  as  order  13  501,  and  the  fifth  order 
of  nuts  will  be  order  94305. 

Checking  the  Quantity.  As  will  be  observed,  there 
are  three  spaces  at  the  bottom  of  the  requisition 
which  refer  to  quantity,  the  quantity  in  stock,  the 
quantity  due  on  previous  orders,  and  the  total 
amount  used  during  the  past  six  months.  This  infor- 
mation in  combination  with  the  quantity  asked  for 
gives  the  purchasing  agent  all  that  he  needs  to  know. 
He  can  tell  what  is  on  hand  at  the  time,  he  can  tell 
what  the  average  need  is  per  month,  how  much  has 
already  been  ordered,  and  from  his  records  he  can  tell 
when  that  material  is  likely  to  arrive.  He,  therefore, 
knows  whether  the  amount  asked  for  is  excessive  or 
not  enough. 

Why  should  he  care  about  this?  Because  money 
tied  up  in  stock  is  idle.  The  larger  the  quantity  of 
stock  or  raw  material  kept  on  hand,  the  more  money 
is  tied  up,  and  the  larger  the  working  fund  rnust  be. 
On  the  other  hand,  the  quantity  should  never  be 
allowed  to  run  so  low  that  the  factory  may  at  any 
time  lack  the  necessary  material,  for  that  would  lead 
to  another  expense — idle  machinery. 


BUSINESS     ORGANIZATION  249 

It  is  no  simple  matter  to  determine  how  much 
should  be  kept  on  hand  of  any  one  item.  Experience 
and  judgment  must  be  called  upon  to  determine  this, 
but  that  does  not  mean  that  it  can  be  determined  by- 
guess.  The  factors  which  play  a  part  in  determining 
the  correct  amount  are:  the  average  daily  use,  the 
ease  with  which  a  new  supply  can  be  obtained,  and 
the  length  of  time  that  usually  elapses  between  the 
time  when  the  order  is  placed  and  when  delivery  is 
made.  These  considerations  will  determine  how  low 
the  supply  may  be  allowed  to  run  and  also  how  large 
an  order  must  be  placed.  It  is  also  expensive  to 
order  too  frequently  and  too  little  at  one  time,  for  a 
small  order  takes  as  much  work  at  the  ofhce  and 
costs  almost  as  much  in  freight  and  drayage  as  a 
large  order. 

The  Stock  Clerk's  Duties,  In  many  concerns  the 
stock  clerk  is  a  member  of  the  office  staff  of  the  pur- 
chasing agent.  The  stock  clerk  supervises  the  stock 
room,  and  it  is  his  duty  to  send  in  requisitions  when 
stocks  run  low.  In  order  to  be  able  to  insure  the 
necessary  supply,  the  stock  clerk  must  keep  his 
stock  in  a  very  systematic  way,  and  also  must  keep 
careful  records. 

The  best  way  to  keep  stock  and  also  raw  material 
is  usually  in  bins.  These  may  be  arranged  in  lanes 
or  streets  and  numbered  with  the  standard  numbers 
of  the  articles,  very  much  after  the  manner  of  house 
numbers.    At  the  side  of  each  bin  may  be  hung  a 


250  BUSINESS     ORGANIZATION 

"bin  ticket/'  On  this  ticket  will  appear  the  name, 
number,  and  description  of  the  article,  and  the  pur- 
pose for  which  it  is  used.  The  ticket  also  contains 
columns  where  the  quantity  ordered,  received,  and 
delivered  to  various  departments,  and  the  balance  of 
stock  are  shown.  This  ticket,  therefore,  tells  the 
nature,  history,  and  present  condition  of  the  goods 
in  the  bin.  In  addition  to  this  information,  there  is 
shown  in  a  conspicuous  place  the  maximum  and 
minimum  which  should  be  carried  in  stock.  An 
example  of  such  a  ticket  is  given  on  the  opposite  page. 

The  stock  clerk  uses  the  information  on  this  ticket 
to  make  out  his  requisition  on  the  purchasing  de- 
partment. 

Collecting  Information,  The  purchasing  depart- 
ment, after  receiving  the  requisition  made  out  in  prop- 
er form,  must  now  decide  where  to  place  the  order. 

A  well-managed  purchasing  department  will  keep 
information  which  will  make  it  possible  to  decide 
quickly  where  the  order  should  be  placed.  Cata- 
logues of  firms  dealing  in  the  products  which  are  con- 
stantly needed  are  kept  on  file  and  carefully  indexed, 
so  that  information  may  be  obtained  with  little  delay. 
Market  reports  are  kept  up  to  date,  so  that  prices  of 
the  staple  products  may  be  known. 

In  addition  to  this  general  information,  a  card 
catalogue  may  be  kept  in  which  each  article  is  repre- 
sented by  a  card.  On  one  side  of  the  card,  the  nanie, 
number,  and  description  of  the  article  appear,  and 


BUSINESS     ORGANIZATION 


251 


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MAXIMUM 


252  BUSINESS     ORGANIZATION 

there  are  columns  in  which  the  past  orders  are  re- 
corded with  such  remarks  as  will  make  it  possible  to 
tell  at  a  glance  what  the  experience  was  with  the 
various  firms,  whether  delivery  was  made  when 
promised,  or  whether  the  articles  were  up  to  stcin- 
dard ;  somewhat  after  this  model : 

__/  \ 


SPECinCATIONS 


FIRM 


ADDRESS 


TERMS 
DEUVERY 


ORDER  NS  DATE 


PRICE  QUANTITY 


As  quotations  are  received  from  firms,  solicited  or 
unsolicited,  a  record  is  made  of  them  on  the  back  of 
the  card.  In  this  way  information  regarding  possible 
sources  of  supply  is  accumulated. 

Right  here  a  word  must  be  said  about  the  traveling 
salesman.  The  modem  up-to-date  business  man  no 
longer  looks  upon  him  as  a  nuisance  to  be  dismissed 
in  any  way,  provided  it  is  effectively  done.  The 
salesman  has  something  to  offer  which  can  legiti- 
mately demand  the  attention  of  the  business  man. 


BUSINESS     ORGANIZATION  253 

In  order  to  sell  with  profit,  buying  must  be  done  in- 
telligently, and  no  one  charged  with  purchasing  can 
afford  to  dismiss  any  offer  that  may  be  made,  with- 
out giving  it  attention.  Someone  in  the  office  should 
find  time  to  listen,  and  to  give  due  consideration  to 
any  businesslike  offer.  Firms  like  the  Ford  Motor 
Company,  the  National  Cash  Register  Company, 
and  others  of  like  importance  receive  salesmen  most 
courteously  and  send  them  away  satisfied  that  they 
have  been  given  a  fair  chance  to  present  their  case. 
It  has  been  the  experience  of  these  firms  that  to  shut 
the  door  to  unsolicited  salesmen  closes  the  way  to 
•the  introduction  of  many  valuable  improvements,  fre- 
quently allows  buying  to  fall  into  a  rut,  and  often  leads 
to  an  undue  favoring  of  old  sources  of  supply,  because 
of  ties  of  friendship,  or  for  the  sake  of  "rake  off , "  or  graft. 
The  purchasing  agent  should  always  be  approachable, 
for  in  no  other  way  can  he  check  his  subordinates. 

Sending  Out  Requests  for  Quotations.  Where  a 
requisition  is  received  for  unusual  goods,  amd  also  in 
those  cases  where  no  recent  quotations  are  available, 
a  letter  is  sent  to  the  various  possible  sources  of 
supply.  Such  a  letter  will  usually  read : 
Gentlemen : 

Kindly  quote  us  at  once  your  best  price  and  date  of 
delivery,  giving  f.o.b.  point  and  terms  on  the  following: 

(Here  the  goods  are  described  in  detail.) 
Yours  truly, 

Purchasing  Agent 


254  BUSINESS     ORGANIZATION 

Often  the  words,  "This  is  not  an  order,"  are 
printed  in  red  across  the  face  of  the  letter  to  make 
sure  that  the  request  will  not  be  misunderstood* 

When  the  replies  come  in,  they  are  tabulated  upon 
a  large  sheet,  giving  in  parallel  columns  the  name  of 
the  firms,  the  price,  the  terms,  the  f.  o.  b.  point,  and 
the  date  of  delivery.  At  the  bottom  of  the  sheet  is 
found  a  space  where  the  reason  for  placing  the  order 
with  the  firm  finally  selected  may  be  indicated. 
This  serves  as  a  permanent  record  of  the  placing  of 
the  order. 

What  Determines  the  Placing  of  the  Order.  The 
purchasing  agent  in  arriving  at  a  decision  is  guided 
by  many  facts.  The  price  is  one  of  the  most  impor- 
tant considerations.  The  f.  o.  b.  point  affects  the 
price  in  that  the  place  where  the  goods  are  delivered 
f .  o.  b.  (free  on  board)  the  railroad  cars,  determines 
the  freight  and  drayage  that  will  have  to  be  paid. 
The  terms  are  also  important.  A  cash  discount  of 
6  per  cent  is  not  as  favorable  as  one  of  lo  per  cent, 
while  6  per  cent — ^20d  (if  paid  within  20  days)  is  bet- 
ter than  6  per  cent — lod  (if  paid  within  10  days). 

Though  the  price  is  an  important  factor,  it  alone 
will  not  determine  where  the  order  will  be  placed. 
The  quality  also  must  be  considered.  Nor  is  the  best 
quality  at  the  lowest  price  necessarily  the  most  at- 
tractive offer.  A  factory  is  often  not  so  much  inter- 
ested in  the  best  quality  as  in  the  right  quality.  Its 
machinery  may  require  a  certain  grade  which  need 


BUSINESS      ORGANIZATION  255 

not  necessarily  be  a  high  grade,  while  its  finished 
product  sold  under  a  trade-mark  must  be  uniform  in 
quality. 

When  goods  are  needed  by  a  certain  time,  the  date 
of  delivery  may  also  play  a  part  in  the  decision.  In 
short,  the  order  will  be  placed  where  the  best  price 
for  the  right  quality  is  combined  with  the  correct 
time  of  delivery,  with  the  understanding  that  due 
attention  must  be  paid  to  the  records  of  past  per- 
formance of  competing  firms.  A  firm  which  failed 
to  deliver  on  time  in  the  past  will  not  be  selected  in 
an  emergency  where  time  is  highly  important. 

Following  Up  the  Order.  The  responsibility  of  the 
purchasing  department  does  not  end  when  the  order 
is  placed.  The  department  must  follow  up  the  order 
to  make  certain  that  delivery  will  take  place  when 
originally  promised.  This  is  done  by  sending  a  letter 
or  post  card  to  the  firm  in  question,  reminding  them 
of  the  promise,  and  asking  whether  delivery  will  be 
made  on  time.  This  letter  is  sent  sometime  before 
the  order  is  due. 

Once  the  order  has  been  sent  off,  the  purchasing 
agent  will  receive  due  notice  from  the  seller,  and  he 
must  then  see  to  it  that  the  receiving  clerk  has  the 
proper  instructions  so  that  he  may  receive  and  check 
the  shipment  without  delay.  A  delay  in  checking 
the  shipment,  in  comparing  the  actual  amount  and 
quality  received  with  the  amount  and  quality  called 
for  in  the  order,  may  result  in  the  forfeiture  of  the 


256  BUSINESS     ORGANIZATION 

right  to  claim  damages  or  rebates.  A  rebate  is  a 
reduction  in  the  price  allowed  to  compensate  for 
failure  to  deliver  the  goods  according  to  order. 

Where  the  receiving  clerk  is  not  capable  of  judging 
the  quality  of  the  goods,  a  special  inspector  is  often 
appointed  and  sometimes  a  laboratory  is  installed 
where  the  articles  may  be  tested,  and  compared  with 
the  specifications.  When  the  order  has  been  properly 
filled,  the  purchasing  agent  notifies  the  accounting 
department,  which  records  the  purchase,  and  in  time 
instructs  the  cashier  to  make  payment. 

In  some  business  houses,  the  purchasing  depart- 
ment sees  to  it  that  the  cashier  does  not  neglect 
taking  advantage  of  the  cash  discount  by  sending 
him  a  communication,  usually  printed  on  red  paper, 
a  day  before  the  end  of  the  period  over  which  the 
discount  extends. 

The  Purchasing  Agent  as  a  Seller.  One  other  func- 
tion is  sometimes  intrusted  to  the  purchasing  agent 
and  his  department.  He  is  often  charged  with  the 
selling  of  "scrap,"  "waste,"  and  "seconds."  Scrap  is 
the  term  used  for  parts  of  the  machinery  which  have 
been  used  up  and  have  been  replaced.  Waste  may 
be  quite  valuable,  and  may  sometimes  assume  the 
dignity  of  a  by-product,  while  seconds  are  goods 
which  have  been  produced  in  the  factory,  but  which 
have  been  rejected  by  inspectors  as  not  quite  up  to 
standard.  They  may  be  good  and  serviceable,  but 
they  are  not  good  enough  to  bear  the  firm's  trade- 


BUSINESS     ORGANIZATION  257 

mark.  Where  seconds  are  produced  in  large  quan- 
tities they  are  frequently  marketed  under  a  different 
trade-mark,  and  they  find  their  way  to  a  different 
class  of  consumers  through  the  regular  sales  channels. 

The  reason  why  the  purchasing  agent  is  called  upon 
to  sell  the  scrap,  waste,  and  occasional  seconds,  is 
that  the  regular  sales  department  does  not  know 
what  to  do  with  them.  They  do  not  know  the  people 
who  buy  such  things.  They  deal  with  the  small  group 
of  wholesalers  or  retailers  who  only  handle  the  fin- 
ished article.  The  purchasing  agent,  through  his 
buying  of  raw  and  partly  finished  products,  has  a 
wide  acquaintance  with  manufacturers  and  whole- 
salers who  are  more  likely  to  be  in  the  market  for 
such  products. 

Many  concerns  leave  it  to  the  individual  depart- 
ments to  sell  their  own  scrap,  waste,  and  seconds. 
This  is  not  the  most  efficient  way.  The  purchasing 
agent  knows  the  market  and  by  concentrating  such 
sales  in  his  hands,  he  may  build  a  fairly  regular 
market  for  them,  and  consequently  obtain  better 
prices. 

The  Retail  Buyer,  The  buyer  in  a  retail  store  is 
quite  a  different  person  from  a  purchasing  agent  in  a 
factory.  After  all  in  a  factory  the  making  of  an 
article  is  the  main  thing,  and  proper  buying  is  merely 
an  aid,  be  it  a  valuable  one.  In  the  retail  store  it  is 
different.  The  buyer  is  one  of  the  most,  if  not  the 
most  important  person.    In  fact,  the  buyers  and  the 


258  BUSINESS     ORGANIZATION 

sales  people  constitute  the  store,  all  the  other  depart- 
ments are  secondary. 

The  buyer's  work  is  difficult,  but  most  fascinating. 
He  must  know  the  customers  of  his  store,  their  likes 
and  dislikes.  He  must  know  what  they  will  buy  and 
what  they  will  reject.  He  must  know  what  prices 
will  make  them  suspicious  of  quality,  and  he  must 
buy  with  these  thoughts  in  mind.  He  must  never 
forget  that  what  he  buys  he  is  not  buying  for  him- 
self, but  for  his  customers.  His  tastes  do  not  matter, 
he  must  always  see  with  the  eyes  of  the  probable 
customer. 

This  means  that  in  order  to  be  a  good  buyer  he 
must  first  of  all  be  a  good  salesman,  and  must  have 
the  ability  to  "size  up  people."  He  must  constantly 
be  informed  of  the  changing  notions  of  the  customers. 
This  he  can  only  do  by  obtaining  the  intelligent  co- 
operation of  the  sales  people,  so  that  remarks 
dropped  by  a  customer  may  be  correctly  interpreted 
and  reported. 

Determining  the  Demand.  In  order  to  keep  in- 
formed on  the  kind  of  goods  customers  demand, 
many  stores  provide  their  sales  people  with  "requisi- 
tion" slips  which  are  filled  out  whenever  any  article 
is  requested  which  is  not  kept  in  stock.  When  fre- 
quent calls  are  made  for  such  articles,  the  buyer  then 
decides  whether  it  would  be  wise  to  place  these 
goods  in  stock. 


BUSINESS     ORGANIZATION  259 

Advance  sales  from  a  carefully  sdected  but  limited 
stock  may  also  be  used  to  give  the  buyer  some  indi- 
cation of  the  kind  of  goods,  or  the  particular  model, 
which  will  be  popular  during  the  season.  Additional 
orders  can  then  be  placed  for  these  models. 

Many  stores  maintain  a  corps  of  shoppers.  These 
are  usually  women  trained  for  this  work,  who  visit 
the  competing  establishments  in  the  city,  and  occa- 
sionally in  neighboring  cities,  to  find  out  what  other 
stores  are  selling,  at  what  prices,  and  whether  the 
goods  seem  to  be  "moving"  or  find  no  sale. 

The  keeping  of  a  current  or  perpetual  inventory 
book  may  also  aid  in  keeping  the  buyer  informed  in 
regard  to  the  popularity  of  certain  goods.  Such  an 
inventory  book  corresponds  to  the  bin  tickets  in  the 
stock  room  of  a  factory,  and  from  it  the  amount  on 
hand  and  the  average  daily  sales  may  be  determined 
at  a  glance. 

It  must  not  be  concluded  from  what  has  been  said 
that  the  buyer  will  not  be  called  upon  to  exercise  his 
judgment,  and  that  he  may  rely  entirely  on  such 
figures  and  statistics.  Most  goods  are  ordered  far 
ahead  of  the  demand,  sometimes  as  much  as  six 
months,  and  the  buyer  must,  therefore,  depend  en- 
tirely upon  his  judgment  when  determining,  not  only 
what,  but  how  much  he  is  to  purchase. 

In  deciding  the  quantity  he  will  order,  he  must 
study  not  only  his  own  customers,  but  the  general 
economic  conditions  as  well.    If  the  crops  in  a  certain 


26o  BUSINESS     ORGANIZATION 

section  of  the  country  are  exceptionally  large,  and 
good  prices  prevail,  the  quantity  of  luxury  goods 
purchased  may  safely  be  made  larger,  and  there  will 
also  be  better  markets  for  agricultural  implements 
than  when  the  crops  are  poor.  In  the  latter  case,  even 
necessities  may  not  find  a  ready  market.  When,  after 
a  period  of  high  prices  and  speculation,  a  change  in 
the  world's  affairs  makes  the  immediate  future  un- 
certain, a  general  policy  of  waiting  among  customers 
will  make  it  unwise  for  the  retailer  to  stock  heavily 
with  goods.  He  always  runs  the  risk  when  buying 
at  the  old  high  prices  of  being  forced  to  sell  at  a 
much  lower  price. 

The  buyer  must,  therefore,  study  carefully  the 
market  reports  and  the  financial  papers,  watching  for 
every  sign  which  may  give  him  a  clue  to  the  possible 
future  conditions  of  the  retail  market.  He  must  also 
bear  in  mind  the  relation  of  goods  to  events.  A  high 
price  for  cotton  will  mean  a  large  acreage  planted  in 
cotton,  and  this  will  create  an  active  demand  for 
farm  implements.  National  holidays  will  mean  a 
demand  for  flags  and  emblems,  and  a  national  "swat 
that  fly"  campaign  will  result  in  an  increased  demand 
for  fly  swats,  fly  traps,  and  fly  paper.  In  all  such 
purchases,  extreme  care  must  be  exercised,  for  to  be 
caught  with  a  large  stock  of  "specialties"  when  the 
demand  is  gone  will  mean  heavy  loss.  The  stores 
which  had  large  stocks  of  service  flags  and  buttons, 
officers'  uniforms,  and  other  military  equipment  on 


BUSINESS     ORGANIZATION  261 

hand  when  the  armistice  was  signed,  have  been  com- 
pelled to  sell  much  of  this  stock  at,  or  even  below 
cost,  in  order  to  clear  their  shelves  for  the  goods  de- 
manded by  civilians. 

How  Buying  Is  Done.  Retail  stores  are  constantly 
visited  by  traveling  salesmen  representing  whole- 
sale firms  or  manufacturers.  Much  of  the  buying  of 
retail  stores  takes  place  through  these  representatives 
and  also  from  catalogues.  But  this  method  of  buying 
is  largely  limited  to  more  or  less  standardized  goods 
such  as  hardware,  tobacco,  and  groceries.  Goods 
which  are  subject  to  fashions  cannot  successfully  be 
bought  in  this  manner.  No  buyer  can  afford  to 
place  an  order  with  one  firm  until  he  has  had  an 
opportunity  to  see  what  other  firms  have  to  offer, 
and  what  the  prevailing  styles  and  models  are  that 
season. 

The  buying  of  such  articles  is,  therefore,  usually 
not  done  at  home.  The  buyer  travels  to  the  place 
where  the  articles  are  produced,  or  where  the  whole- 
sale dealers  are  concentrated.  He  visits  many  es- 
tablishments inspecting  practically  the  entire  stock 
before  he  places  his  orders.  Some  buyers  travel 
abroad  visiting  the  manufacturing  wholesalers  of 
Paris,  Lyons,  Brussels,  London,  and  other  important 
commercial  centers.  In  some  cases,  buyers  travel  for 
this  purpose  both  to  Europe  and  Asia.  They  go  to 
Ireland  to  buy  linen  and  take  this  material  to  Japan 
to  supervise  the  embroidery,  after  which  they  import 


262  BUSINESS     ORGANIZATION 

the  finished  articles  into  the  United  States.  Such 
buying  requires  a  thorough  knowledge  of  the  domes- 
tic and  foreign  markets,  and  requires  a  considerable 
outlay.  In  the  case  of  women^s  apparel,  however, 
there  seems  to  be  no  other  method  but  this  direct 
buying  by  the  firm's  representatives. 

Much  of  the  original  designing  of  ladies*  wearing 
apparel  is  still  done  by  the  artists  of  Paris.  The 
American  wholesale  houses  send  their  agents  abroad 
to  make  selections  after  a  careful  study  of  the  models 
in  the  shops  and  of  the  styles  on  the  Boulevards. 

The  American  representative  will  then  purchase 
one  or  a  number  of  the  most  successful  creations. 
The  manufacturer  copies  it  and  modifies  it  somewhat 
and  need  have  no  fear  that  others  will  produce  the 
same  design. 

The  buyer  of  the  retail  store  visits  the  wholesalers 
of  New  York  or  Chicago  and  has,  therefore,  a  large 
market  to  choose  from,  a  market  which  represents 
the  best  effort  of  the  designers  of  two  continents.  In 
order  to  aid  the  buyers  of  women's  apparel,  the 
wholesale  firms  maintain  showrooms  where  the 
buyers  are  seated  in  individual  booths  while  living 
models  walk  past  displaying  the  various  garments 
which  the  firm  has  for  sale.  As  each  girl  passes  by 
the  booth  she  announces  the  stock  number  and  the 
price  of  the  article  and  the  buyer  jots  down  notes 
upon  a  memorandum  pad  from  which  he  later  makes 
up  the  final  order. 


BUSINESS     ORGANIZATION  263 

In  some  cities  a  tendency  is  noticeable  to  concen- 
trate all  such  display  rooms  in  one  or  a  small  number 
of  buildings,  so  that  a  buyer  may  lose  no  time  in 
traveling  from  place  to  place.  In  New  York  the 
Bush  Building  on  Forty-second  Street  near  Broad- 
way is  an  example.  This  is  a  large  building  of  great 
beauty  of  which  the  lower  floors  are  fitted  out  as 
clubrooms,  restaurant,  barber  shop,  men's  and 
women's  parlors  for  the  comfort  of  men  and  women 
buyers,  while  the  upper  floors  are  entirely  devoted  to 
showrooms.  Many  of  the  best-known  manufac- 
turers of  shoes,  hats,  and  of  men's  and  women's 
clothes  have  showrooms  and  offices  in  this  building. 

Supervising  the  Selling.  The  buyer  of  the  retail 
store  is  held  responsible  if  the  goods  which  he  has 
purchased  do  not  sell.  He  is,  therefore,  directly 
interested  in  the  selling  methods  of  the  store,  in  the 
way  in  which  goods  are  advertised  or  displayed,  and 
in  the  character,  training,  and  efficiency  of  the  sales 
people.  This  phase  of  the  retail  buyer's  work  will  be 
discussed  in  detail  in  the  chapter  dealing  with  retail 
selling. 

The  Purchasing  Agent  in  the  Retail  Store,  Besides 
the  buyers,  of  which,  in  some  cases,  there  are  as 
many  as  there  are  departments  in  the  store,  there  is, 
in  all  large  stores,  a  purchasing  agent  whose  duty  it 
is  to  buy  current  supplies,  such  as  wrapping  paper, 
twine,  writing  paper,  and  other  office  supplies,  and 
who  may  also  be  charged  with  buying  the  store  fix- 


264  BUSINESS     ORGANIZATION 

tures  and  office  equipment.  His  duties  are  essen- 
tially the  same  as  those  of  the  purchasing  agent  in  a 
factory  and  need,  therefore,  no  further  description. 

Summary.  Purchasing  is  quite  as  difficult  and  im- 
portant as  selling.  It  is  preferable  to  centralize  pur- 
chasing in  one  office.  The  purchasing  department 
places  orders  upon  requisitions  received  from  stock 
room,  storeroom,  shop,  or  office.  Care  is  exercised 
to  order  just  enough,  and  of  the  right  quality.  The 
purchasing  agent  must  keep  information  showing 
the  record  of  past  purchases,  possible  sources  of 
supply,  market  prices,  etc.  The  order  is  placed  after 
considering  price,  quality,  terms  of  payment,  time  of 
delivery,  and  the  record  of  the  firm.  The  purchasing 
agent  may  also  be  in  charge  of  the  selling  of  scrap, 
seconds,  and  waste. 

Buying  for  a  retail  store  is  quite  a  different  thing 
from  buying  for  a  factory.  Retail  buying  requires  a 
knowledge  of  customers,  of  store  policy,  and  of  the 
wholesale  market.  A  constant  study  of  markets  is 
necessary.    Buyers  supervise  selling. 

REFERENCES 

Same  as  preceding  chapter.    Additional  references : 

C.  C.  Field.    Retail  Buying.    Harper  &  Brothers. 

H.  B.  Twyford.  Purchasing,  D.  Van  Nostrand  Company. 

QUESTIONS  FOR  FURTHER  STUDY 

I.  Contrast  the  consequences  resulting  from  efficient 
and  inefficient  buying. 

Reference:  Twyford.    Chapter  I. 


BUSINESS     ORGANIZATION  265 

2.  How    is    the    purchasing    department    frequently 
organized? 

Reference:  Twyford.     Chapters  V,  VI. 

3.  What  is  meant  by  a  merchandising  plan,  and  what 
is  its  relation  to  the  buying  for  a  retail  store? 

Reference:   Field.    Chapter  IV. 

4.  What  are  the  various  steps  in  the  buying  process? 
Reference:   Field.    Chapter  V. 

5.  What  qualifications  must  a  retail  store  buyer  pos- 
sess? 

Reference:   Field.    Chapter  XV. 

6.  What  qualifications  must  a  purchasing  agent  pos- 
sess? 

Reference:  Twyford.    Chapter  IV. 

7.  How  are  invoices  handled  in  a  purchasing  depart- 
ment? 

References:  Twyford.    Chapter  X. 

Parsons.  Office  Organization.    Chapters 
XXII,  XXIII,  XXIV,  XXV. 

TEST  QUESTIONS 

1.  What  kind  of  information  should  be  collected  in  a 
purchasing  department? 

2.  How  does  a  purchasing  agent  decide  where  to  place 
an  order? 

3.  How  is  the  order  placed? 

4.  Of  what  does  the  work  of  a  retail  buyer  consist? 

5.  What  information  can  be  obtained  from  an  inven- 
tory book? 


266  BUSINESS     ORGANIZATION 


CHAPTER   XIII 

MARKETING 

The  Term  Defined,  Under  the  term  "marketing" 
we  understand  the  processes  by  means  of  which 
goods  pass  from  producer  to  consumer.  The  ulti- 
mate object  of  marketing  is  to  place  the  goods  in  the 
hands  of  the  consumer.  The  chain  that  connects  the 
consumer  with  the  producer  may  be  simple  or  com- 
plex. Some  goods  pass  directly  from  the  producer  to 
the  consumer,  while  other  goods  usually  follow  a 
roundabout  way  and  pass  through  the  hands  of  a 
number  of  "middlemen"  before  they  reach  the  ulti- 
mate consumer. 

The  methods  of  marketing  agricultural  and  other 
raw  products  are  quite  different  from  those  used  in 
connection  with  manufactured  articles.  The  reason 
for  this  is  not  difficult  to  see.  Raw  products  cannot 
be  marked  so  that  their  identity  may  be  traced. 
Wheat  in  a  New  York  elevator  may  have  been  grown 
in  the  Dakotas  or  in  Canada;  once  it  has  left  the 
farm,  the  farmer  himself  would  not  be  able  to  recog- 
nize it.  Such  articles  are,  therefore,  always  handled 
in  bulk  and  are  bought  and  sold  according  to  quality 
and  quantity. 


BUSINESS     ORGANIZATION  267 

In  the  case  of  manufactured  products  this  is  dif- 
ferent. There  is  an  almost  unlimited  range  of  possi- 
bilities in  making  any  one  article.  In  order  to  buy 
these  goods  intelligently,  they  must  be  inspected  or 
they  must  be  guaranteed  by  some  reputable  dealer 
to  be  uniform  in  grade  by  means  of  a  trade-mark. 

These  fundamental  differences  affect  the  method 
of  marketing  and  make  it  necessary  to  divide  our 
description  of  marketing  into  two  sections.  We  shall 
first  deal  with  the  marketing  of  farm  products,  and 
shall  then  discuss  the  marketing  of  manufactured 
products. 

The  Marketing  of  Farm  Products.  When  the  coun- 
try was  but  sparsely  populated  and  the  cities  small, 
the  farmers  living  in  the  immediate  neighborhood  of 
a  town  would  almost  wholly  supply  the  consumers 
direct.  In  many  of  the  smaller  towns  farm  products 
are  still  marketed  by  "hucksters"  who  go  from  door 
to  door.  In  the  larger  cities  farmers  often  sell  to  the 
consumers  in  the  municipal  markets.  Such  markets 
are  found  very  generally  in  Europe  and  are  more  and 
more  being  introduced  in  this  country  as  a  means  of 
cutting  down  the  cost  of  bringing  farm  products  to 
the  consumer. 

The  local  stores  frequently  sell  the  products  which 
they  have  bought  "in  trade"  from  the  farmers.  Po- 
tatoes, eggs,  poultry,  apples,  and  vegetables  are 
commonly  handled  by  these  stores.  They  usually 
only  supply  the  local  trade,  though  sometimes  they 


268  BUSINESS     ORGANIZATION 

also  ship  the  surplus  out  of  town  to  the  larger  cities. 

In  some  parts  of  the  country  the  local  store  plays  a 
very  important  part  in  the  economy  of  the  com- 
munity. In  the  South  these  stores  supply  the  farmer 
with  all  he  needs  during  the  year  on  credit.  The 
farmer  pledges  his  crop  with  the  storekeeper  as  se- 
curity for  the  goods  received,  and  agrees  to  sell  the 
crop  to  him.  The  dealer  charges  a  high  rate  of  inter- 
est on  the  loan  and  deducts  a  fat  dealer's  profit  or 
commission  from  the  price  of  the  crop.  The  farmer, 
therefore,  finds  this  method  of  obtaining  credit  very 
expensive. 

The  Local  Buyer.  The  farm  products  which  the 
local  market  cannot  absorb  are  usually  sold  to  local 
buyers  who  ship  the  products  to  the  distant  cities  or 
trading  centers.  These  buyers  perform  important 
services.  They  provide  for  the  farmer  a  ready  mar- 
ket ;  they  look  after  the  making  of  shipments,  thereby 
relieving  the  farmer  of  all  responsibility  and  risk; 
they  combine  the  products  into  large  shipments, 
thereby  securing  better  transportation  service;  and 
finally,  they  sort  and  grade  the  products.  The  large 
quantity  of  products  handled  by  them  makes  this 
grading  possible. 

Grading  of  Products.  The  trading  in  raw  products 
is  much  expedited  by  a  system  of  grades.  Before 
grades  were  introduced,  wheat,  cotton,  wool,  and 
other  similar  products  could  not  be  sold  until  they 
were  inspected  by  the  buyer.    This  meant  that  these 


BUSINESS     ORGANIZATION  269 

products  could  not  be  sold  by  the  farmer  or  the  local 
buyer  to  the  consumer  or  manufacturers  until  the 
goods  had  actually  arrived  in  the  trading  centers. 
There  was  much  uncertainty  in  regard  to  the  price 
the  goods  would  bring  in  that  market. 

Through  the  introduction  of  grades  the  quality  of 
the  goods  is  standardized  and  is  definitely  known. 
This  makes  inspection  of  the  goods  themselves  un- 
necessary when  they  are  offered  for  sale.  They  are 
now  sold  by  grade.  Wheat,  instead  of  being  sold  by 
sample,  is  now  sold  as  Red  Winter  No.  3,  Spring 
Wheat  No.  i,  or  by  some  other  name  and  number. 
Cotton,  sugar,  and  a  long  list  of  minor  farm  products 
are  in  this  fashion  sold  by  standard  grade.  These 
products  may  now  be  sold  before  they  reach  the 
market.  The  prices  of  the  standard  grades  are  pub- 
licly announced  and  it  is,  therefore,  possible  to  direct 
the  goods  to  those  markets  where  the  highest  price 
is  paid. 

The  Exchanges.  The  character  of  the  central 
markets  has  been  changed  in  consequence  of  the 
introduction  of  standard  grades.  Before  these  grades 
were  used,  goods  were  sold  at  auction  as  they  arrived. 
Now  they  may  be  sold  on  exchange  before  they  have 
arrived.  They  often  change  hands  several  times 
while  traveling  from  one  market  to  another.  These 
exchanges  are  usually  incorporated  associations  of 
dealers  in  farm  products.  There  are  exchanges  which 
handle  only  one  commodity,  such  as  the  New  Orleans 


270  BUSINESS     ORGANIZATION 

Cotton  Exchange,  while  others  handle  a  variety  of 
products,  as,  for  instance,  the  New  York  Produce 
Exchange,  where  grain,  flour,  and  meat  products  are 
bought  and  sold. 

The  methods  of  dealing  on  these  exchanges,  and 
the  conditions  of  membership  are  all  regulated  by  the 
association.  The  exchanges  play  an  important  part 
in  establishing  and  maintaining  standard  grades. 
Many  of  them  undertake  to  inspect,  weigh,  and  to 
grade  the  products.  An  arbitration  committee 
settles  controversies  between  members.  A  statistical 
department  collects  and  distributes  among  the  mem- 
bers information  in  regard  to  the  conditions  of  the 
crops  in  this,  and  in  other  countries,  and  other  data 
likely  to  affect  the  present  and  future  prices  of  the 
products. 

Since  the  grades  established  by  these  well-known 
exchanges  are  internationally  known,  their  prices 
also  become  world  prices. 

The  Wheat  Trade,  The  wheat  market  is,  perhaps, 
more  perfectly  organized  than  any  other.  The 
wheat  bought  by  the  local  dealers  is  stored  in  the 
local  elevators.  These  are  large  storehouses.  Many 
of  them  are  owned  by  the  local  dealers  individually 
or  co-operatively.  Others  are  owned  by  large  "line 
elevator  companies,"  and  still  others  are  owned  by 
the  farmers'  co-operative  organizations.  The  line 
elevator  companies  are  large  concerns  which  main- 
tain elevators  in  various  sections  of  the  country. 


BUSINESS     ORGANIZATION  2/1 

They  buy  the  grain  from  the  farmer  through  travel- 
ing agents  and  sell  it  on  the  exchange  through  their 
own  representatives.  They,  therefore,  have  the  ad- 
vantage over  the  local  buyers  who  must  sell  through 
some  broker  to  whom  they  must  pay  a  commission. 

As  the  grain  is  placed  in  the  elevators  it  is  graded, 
but  these  grades  are  not  official.  The  official  grades 
are  not  established  until  the  grain  arrives  at  the 
primary  market.  These  primary  markets  are  great 
collecting  centers  for  the  grain  of  their  territory. 
There  are  many  such  markets,  Minneapolis,  Duluth, 
Chicago,  Omaha,  St.  Louis,  and  others.  In  these 
markets  the  grain  is  concentrated  and  held  until  it 
is  withdrawn  for  exportation  or  for  domestic  con- 
sumption. The  grain  is  shipped  to  these  markets 
from  the  local  markets.  As  it  arrives  at  the  primary 
market  it  is  cleaned,  graded,  and  mixed  with  other 
grain.  The  large  exchanges  are  established  in  con- 
nection with  these  primary  markets. 

Financing  the  Wheat  Crop.  The  local  buyers  or 
agents  pay  cash  for  the  crop.  They  have  the  grain 
stored  in  the  local  elevators  and  receive  warehouse 
receipts  upon  which  they  may  borrow  money  from 
the  banks  placing  the  "grain  paper"  with  them  as 
collateral.  In  case  the  grain  is  shipped  to  a  buyer  in 
a  primary  market  the  local  buyer  may  use  an  "order" 
bill  of  lading  as  collateral  and  draw  a  draft  which  may 
then  be  discounted  at  the  bank.  The  bank  takes  the 
draft  and  the  bill  of  lading  which  is  made  out  to  the 


272  BUSINESS      ORGANIZATION 

"order"  of  the  shipper  and  forwards  these  documents 
to  its  correspondent.  The  correspondent  notifies  the 
consignee,  who  must  first  pay  or  accept  the  draft 
before  he  can  obtain  the  bill  of  lading  which  gives  him 
ownership  of  the  grain.  Accepting  a  draft  means  to 
write  across  the  face  of  the  draft  the  word  "accepted," 
with  the  date,  and  properly  signed. 

The  buyer  at  the  primary  market  may  then  place 
the  wheat  in  the  large  elevators  maintained  at  these 
markets  and  use  the  warehouse  receipts  as  collateral 
for  a  loan. 

From  the  primary  markets  the  wheat  passes  into 
the  hands  of  millers,  exporters,  and  others  through 
whom  it  finally  reaches  the  consumer. 

The  Cotton  Market,  The  marketing  of  cotton  is,  in 
principle,  the  same  as  that  of  wheat.  The  farmers 
usually  sell  their  cotton  in  the  local  market  to  the 
merchants  and  to  the  agents  of  large  cotton  buying 
firms,  or  to  the  local  gin.  The  gin  is  a  mill  where  the 
fiber  is  separated  from  the  seed.  From  this  local 
market  it  is  moved  to  the  mills,  the  ports  of  export, 
or  to  the  central  markets  in  the  interior.  The  bales 
of  cotton  which  leave  the  gin  are  usually  poorly  baled 
and  but  loosely  packed.  They  must,  therefore,  be 
"compressed"  at  the  nearest  compress.  This  reduces 
their  size  about  one  half  and  tightens  the  pack,  so 
that  less  freight  space  is  required  and  the  loss  in 
transit  is  diminished. 


BUSINESS     ORGANIZATION  273 

The  domestic  mills  buy  their  cotton  largely  from 
the  large  buying  firms,  and  only  to  a  limited  degree 
through  brokers  on  the  cotton  exchanges.  The 
reason  is  that  the  mills  need  a  certain  grade  of  fiber 
and  that  the  sales  contract  on  the  exchange  allows 
for  the  substitution  of  one  grade  for  another  when 
making  delivery.  The  official  grades,  as  in  the  case 
of  wheat,  are  determined  by  the  exchanges.  These 
grades  are  based  upon  the  length  of  the  fiber,  the 
color,  and  the  amount  of  foreign  matter  or  trash. 
There  is  no  absolute  uniformity  in  these  grades. 
The  grades  of  different  American  exchanges  differ 
among  themselves,  and  are  again  different  from  the 
grades. established  by  the  European  exchanges. 

The  cotton  that  is  exported  has  either  been  bought 
direct  in  the  local  market  or  has  been  purchased  on 
some  exchange.  It  has  frequently  been  sold  on  some 
European  exchange  even  before  it  leaves  the  United 
States. 

The  Marketing  of  Other  Farm  Products.  Not  all 
products  of  the  farm  are  as  successfully  standardized 
as  cotton  and  wheat.  Nor  is  such  standardization 
possible  in  every  case.  There  is,  however,  a  growing 
tendency  in  that  direction.  In  many  lines,  notably 
in  the  case  of  oranges,  lemons^  and  grapes,  co-opera- 
tive organizations  among  the  farmers  sell  direct  to 
the  wholesale  trade.  They  grade  and  pack  the  fruit 
and  ship  it  often  under  a  co-operative  trade-mark. 
The  "Sunkist"  oranges  are  an  example  of  such  a 


274  BUSINESS     ORGANIZATION 

highly  developed  method  of  marketing  applied  to 
farm  products. 

The  Marketing  of  Manufactured  Products,  Manu- 
factured products  require  different  marketing  meth- 
ods from  those  used  for  agricultural  products.  In 
buying  and  selling  manufactured  products  a  real 
bargaining  process  takes  place;  the  article  is  scru- 
tinized and  compared  with  others  similar  in  con- 
struction and  purpose.  The  price  for  these  articles  is 
not  a  world  price  as  in  the  case  of  cotton  or  wheat. 
Since  the  products  are  not  uniform  in  quality,  they 
cannot  be  sold,  except  upon  inspection,  or  on  the 
basis  of  samples,  and  the  price  is  attached  to  each 
article.  All  White  Winter  Wheat  No.  i  is  sold  at  the 
same  price;  all  low  middling  cotton  sells  at  the  same 
price  at  any  one  time  and  place,  but  who  ever  heard 
of  a  price  for  shoes  No.  9,  or  a  price  for  hats  No.  7? 

Selling  manufactured  goods  means,  therefore^ 
something  different  from  selling  farm  products. 
Manufactured  goods  do  not  sell  themselves.  If  one 
has  hats  for  sale  it  will  be  necessary  to  convince  some 
buyer  that  he  particularly  desires  one  of  those  hats 
to  the  exclusion  of  hats  produced  by  others.  There 
is  much  more  of  the  personal  element  involved  in  the 
selling  of  manufactured  goods.  The  buyer  must  be 
persuaded,  if  not  that  he  is  in  need  of  an  atricle,  at 
least  that  he  should  buy  one  rather  than  another. 

The  manufacturer  may  choose  many  methods  of 
placing  his  goods  in  the  hands  of  the  consumer.    At 


BUSINESS     ORGANIZATION  275 

one  time  most  manufactured  goods — and  this  applies 
also  to  the  various  "package"  goods  and  other  gro- 
ceries sold  under  a  brand  or  trade-mark — reached  the 
consumer  after  a  roundabout  journey,  passing  suc- 
cessively through  the  hands  of  manufacturer,  jobber, 
wholesaler,  and  retailer. 

The  Various  Middlemen  Defined,  The  retailer 
mcikes  it  possible  for  the  consumer  to  supply  himself 
quickly  with  small  quantities  of  a  large  variety  of 
articles.  The  wholesaler  furnishes  the  retailer  with 
the  goods  he  sells  to  his  customers;  in  a  way  he  per- 
forms somewhat  the  same  service  for  the  retailer 
which  the  retailer  performs  for  the  consumer.  By 
buying  from  the  wholesaler,  and  not  from  the  manu- 
facturer direct,  the  retailer  is  saved  the  trouble  of 
establishing  connections  with  many  manufacturers. 
The  orders  he  would  be  able  to  place  with  each  one 
of  them  would  be  relatively  small.  He  would,  there- 
fore, not  be  able  to  command  very  favorable  credit 
terms,  nor  would  he  be  able  to  obtain  good  transpor- 
tation rates  on  his  shipments.  By  buying  through  a 
wholesale  house  a  retailer  may  obtain  an  assorted  lot 
composed  of  a  variety  of  articles,  which  together 
make  a  fairly  large  order.  He  is,  therefore,  able  to 
obtain  better  terms.  The  wholesaler,  located  at  a 
convenient  center,  receives  the  goods  in  carload  lots 
from  the  manufacturers  at  favorable  transportation 
rates.  These  goods  when  reshipped  to  the  retailer 
have  paid  less  freight  than  would  have  been  paid  by 


276  BUSINESS     ORGANIZATION 

the  same  shipment  if  shipped  direct  from  manu- 
facturer to  retailer. 

A  jobber,  strictly  speaking,  is  a  dealer  who  buys 
jobs  J  i.  e.,  special  lots.  These  he  resells  at  a  profit 
to  wholesalers  and  retailers,  or  sometimes  direct  to 
consumers.  In  fact,  the  jobber  has  neither  a  regular 
place  to  buy  nor  a  regular  place  to  sell  the  goods  he 
handles.  More  recently,  however,  the  jobber  has  be- 
come quite  indistinguishable  from  the  wholesaler, 
and  the  two  names  are  now  used  as  if  they  were 
synonymous. 

The  brokers  or  commission  merchants  sell  the 
manufacturers*  goods  to  wholesalers,  jobbers,  or  re- 
tailers on  a  commission  basis,  while  frequently  they 
receive  goods  on  consignment  in  which  case  the  fixing 
of  the  price  is  largely  in  their  hands.  Many  firms  are 
called  "commission  men"  or  "brokers"  when,  in  fact, 
they  are  wholesalers. 

Selling  at  Retail,  One  method  of  selling  at  retail 
is  to  sell  through  canvassers.  This  method  is  a 
modern  form  of  the  old-fashioned  peddler  with  this 
distinction,  that  the  canvasser  rarely  ever  carries  his 
goods  with  him,  but  usually  sells  by  sample.  In 
certain  lines,  and  especially  in  country  districts 
where  retail  stores  are  entirely  absent  or  are  in- 
efficient or  unprogressive,  selling  through  canvassers 
may  be  an  effective  method.  Kitchen  utensils, 
books,  maps,  and  magazines  are  sold  successfully  by 
this  method,  notwithstanding  the  prejudice  which 


BUSINESS     ORGANIZATION  277 

has  been  created  against  the  canvasser  by  the  selling 
of  worthless  articles  by  unscrupulous  members  of 
the  guild. 

The  local  retail  store  is,  however,  by  far  the  most 
important  channel  through  which  goods  reach  the 
consumer.  Success  in  retailing  is  no  longer  easily 
attained,  and  comes  only  as  the  reward  of  careful 
attention  to  all  the  factors  which  make  for  competi- 
tive strength.  Price — at  one  time  the  principal  fac- 
tor in  competition,  and  still  of  great  importance — 
is  no  longer  the  sole  factor.  More  and  more,  con- 
sumers demand  and  receive  superior  service,  fre- 
quently, though  not  always,  paying  a  higher  price. 
The  difference  in  the  prices  of  the  cash  and  carry 
grocery  stores,  and  those  of  the  stores  which  deliver 
and  sell  on  credit,  are  a  case  in  point.  The  problem 
of  the  retailer  is  how  to  give  maximum  service,  and 
still  sell  at  a  competitive  price. 

Retail  stores  may  be  divided  into  three  large 
classes:  the  general  stores,  the  specialty  stores,  and 
the  department  stores.  The  general  store  is  found 
in  country  districts.  Here  goods  of  all  kinds,  gro- 
ceries, notions,  dry  goods,  shoes,  kitchen  utensils, 
and  farm  implements  are  sold  in  the  same  building. 

A  specialty  store  handles  only  one  product  or  class 
of  products.  A  shoe  store,  a  hardware  store,  a  gro- 
cery store,  are  all  specialty  stores.  Such  stores  can 
only  be  conducted  profitably  where  the  amount  of 
trade  is  sufficient  to  warrant  specialization.     They 


278  BUSINESS     ORGANIZATION 

present  a  decided  advantage  over  the  general  store. 
Their  specialization  enables  them  to  keep  a  larger  and 
better  selected  stock;  the  storekeeper  can  study  his 
market  more  carefully  than  where  he  has  to  divide 
his  attention  over  a  large  number  of  products.  This 
means  more  careful  buying  and,  therefore,  a  more 
rapid  turnover  and,  consequently,  a  fresher  and 
more  up-to-date  stock. 

The  Department  Store.  The  department  store  con- 
sists of  a  group  of  stores  housed  in  the  same  building. 
These  separate  stores  or  departments  are,  as  a  rule, 
not  separately  owned,  but  are  owned  by  one  firm 
though  managed  by  different  department  managers. 
Many  such  stores  in  our  large  cities  are  of  gigantic 
proportions.  The  Wanamaker  stores  in  Philadelphia 
and  New  York,  Filene  in  Boston,  and  Marshall  Field 
in  Chicago  are  nationally  known. 

The  public  favors  such  stores  because  of  the  many 
conveniences  they  offer.  Shoppers  in  need  of  a 
variety  of  articles  may  make  all  their  purchases  in 
one  store  and  are,  thereby,  saved  much  time  and 
strength,  while  the  rest  rooms  and  restaurants  of  such 
stores  make  them  convenient  meeting  places.  The 
rapid  and  large  turnover  reduces  the  overhead  per 
unit  sold.  This  is  offset  to  some  extent  by  the 
greater  expense  entailed  in  the  upkeep  of  the  expen- 
sive public  conveniences  which  shoppers  have  learned 
to  demand  in  a  department  store. 


Marshall,  Field  and  Company 
Entrance  to  Chicago  Store 


280  BU.SINESS     ORGANIZATION 

It  is  interesting  to  note  that  many  small  specialty 
stores  are  frequently  doing  an  apparently  profitable 
business  in  the  very  shadow  of  the  large  department 
stores.  Many  causes  are  responsible  for  this.  Many 
shoppers  appreciate  the  personal  interest  which  a 
small  storekeeper  or  his  employees  take  in  their  com- 
paratively small  number  of  customers.  This  personal 
element  is  almost  wholly  lost  in  the  large  department 
store.  The  smaller  store  also  offers  advantages  to 
the  shopper  who  has  little  time  to  spend  in  making 
his  purchase.  There  is  a  class  of  buyers  who  hesitate 
to  enter  a  large  and  beautifully  equipped  store  and 
prefer  to  deal  in  a  modestly  fitted  small  store.  Fin- 
ally, there  will  always  be  a  demand  for  the  "exclusive" 
shop  which  appeals  to  the  whims  of  those  who  do  not 
care  to  buy  the  common  standard  goods,  but  demand 
exclusive  patterns  and  high  prices. 

The  Chain  Store,  Another  strong  factor  in  retail 
competition  is  the  establishing  of  chain  stores.  The 
specialty  store  usually  operates  under  relatively  un- 
favorable circumstances.  Because  of  its  compara- 
tively^ small  turnover,  its  bargaining  power  in  the 
manufacturing  and  wholesale  market  is  not  of  the 
strongest.  Its  advertising  possibilities  are  restricted 
to  the  one  line  handled  and  to  the  locality  in  which 
it  operates. 

The  department  store  attempts  to  meet  these 
problems  by  combining  a  large  number  of  stores 
under  one  roof,  thereby  increasing  its  buying  and 


BUSINESS     ORGANIZATION  28l 

advertising  strength.  The  chain  stores  are  another 
attempt  to  accomplish  the  same  result.  In  this  case, 
however,  the  method  is  to  establish  many  stores  of 
the  same  type  in  various  parts  of  the  same  city  and 
also  in  other  cities.  Many  chain  stores  have  thus 
become  nationally  known.  The  F.  W.  Woolworth 
Company  five-and-ten-cent  stores,  the  United  Cigar 
Stores  Company  tobacco  stores,  the  Kroger  grocery 
stores  in  Ohio,  and  the  Stop  and  Shop  stores  in 
Seattle  are  examples. 

Such  chain  stores,  because  of  their  large  turnover, 
can  buy  more  advantageously.  They  usually  buy 
for  cash,  since  most  of  them  do  a  strictly  cash  busi- 
ness with  their  customers.  Their  advertising  appeal 
is  not  limited  to  one  locality.  When,  as  is  usually 
the  case,  many  chain  stores  are  located  within  a 
small  area,  the  actual  stock  carried  in  any  one  of 
them  may  be  kept  very  small,  thereby  savin^xpense. 
A  central  distribution  warehouse  may  then  carry  a 
relatively  small  surplus  with  which  to  supply  the 
stores  quickly  as  the  stock  runs  low.  The  quantity 
that  must  be  kept  on  hand  in  such  warehouses  is  only 
a  fraction  of  the  quantity  that  would  be  lying  idle  if 
all  stores  kept  their  own  reserve  stock. 

Chain  stores  may  be  retail  stores  which  buy  from 
wholesalers  or  manufacturers  direct.  Those  men- 
tioned above  are  of  this  type.  They  may  be  main- 
tained by  manufacturers  as  an  outlet  to  the  con- 
sumer,  thereby  eliminating  the  middlemen.     The 


282  BUSINESS     ORGANIZATION 

Hanover  Shoe  Company,  and  the  Singer  Sewing 
Machine  Company  follow  this  method.  A  third 
possibility  is  presented  when  stores  individually 
owned  combine  in  order  to  buy  and  to  manufacture 
co-operatively.    The  Rexall  stores  are  of  this  type. 

The  Mail  Order  Business,  Another  method  of  sell- 
ing to  the  ultimate  consumer  is  selling  by  mail.  The 
m.ail  order  business  is  especially  of  importance  in 
rural  communities  which  do  not  have  the  advantage 
of  efficient  and  up-to-date  store  service.  As  in  the 
case  of  the  department  store  and  the  chain  store, 
the  usual  middlemen  are  frequently  dispensed  with, 
and  the  mail  order  house  buys  frequently  direct  from 
manufacturers,  even  contracting  for  their  entire  out- 
put. The  mail  order  house  is  justly  looked  upon  as 
a  dangerous  competitor  to  the  country  retailer. 

Advantages  and  Disadvantages  of  Selling  hy  Mail, 
Where vft-  the  mail  goes,  there  the  printed  advertising 
matter  and  the  goods  shipped  by  the  mail  order 
house  can  also  go.  Through  profusely  illustrated  cat- 
alogues the  country  dweller  is  enabled  to  select  his 
goods  from  a  large  stock.  The  catalogues  of  Sears, 
Roebuck  and  Company,  and  of  Montgomery  Ward 
and  Company  are  found  in  the  remotest  comers  of 
the  country  and  have  contributed  no  little  to  raising 
the  standard  of  living  in  rural  districts. 

The  business  is  almost  always  on  a  cash  basis. 
This  makes  for  economy,  since  bad  debts,  collection 
expenses,  and  interest  on  the  investment  made  in 


BUSINESS     ORGANIZATION  283 

goods  in  the  hands  of  customers,  are  all  eliminated. 
The  overhead  expenses  are  low,  since  the  only  equip- 
ment required  is  an  office  building.  This  item  is  off- 
set by  the  very  high  expense  of  the  printing  and  dis- 
tributing of  catalogues.  Another  saving  is  found  in 
the  better  terms  such  houses  can  make  with  manu- 
facturers and  jobbers  as  a  result  of  their  large  and 
rapid. turnover.  Mail  order  houses  are,  therefore, 
frequently  able  to  sdl  at  lower  prices  than  the 
"legitimate"  retail  stores. 

The  disadvantages  of  selling  by  mail  must  not  be 
underestimated.  Customers  demand  not  only  a  low 
price,  but  also  service.  The  mail  order  house  falls 
short  here  and  can  never  hope  to  supply  it.  -  The  fact 
that  illustrations,  however  successful,  can  never  quite 
take  the  place  of  actual  inspection  of  the  goods  is  also 
an  argument  in  favor  of  the  local  stores.  Customers 
are  also  more  inclined  to  spend  freely  when  they  buy 
on  credit  than  when  they  are  obliged  to  pay  cash — 
this  is  especially  true  in  country  communities. 

The  local  store,  if  managed  properly,  need  have 
little  fear  of  being  driven  out  of  business  by  the  mail 
order  house.  The  superior  service,  the  personal  at- 
tention, and  the  credit  facilities  which  it  can  offer  its 
customers,  combined  with  the  fact  that  goods  can  be 
inspected  and  are  available  without  delay,  makes  its 
position  secure.^ 

The  Manufacturer  and  the  Market,  The  manufac- 
turer has,  therefore,  many  channels  through  which 


284  BUSINESS     ORGANIZATION 

he  may  reach  the  consumer.  No  matter  which  he 
chooses,  however,  he  faces  two  problems:  He  must, 
first  of  all,  persuade  the  middleman  to  handle  his 
products,  and  then  the  customer  must  be  persuaded 
to  buy  them  in  his  turn. 

The  middleman,  especially  if  this  middleman  is  a 
large  wholesaler,  chain  store,  department  store,  or 
mail  order  house,  can  withold  his  patronage  if  he  so 
chooses.  Manufacturers  will,  therefore,  often  under- 
bid each  other  in  an  attempt  to  establish  permanent 
relations  with  some  large  trading  concern.  Such  a 
connection  which  will  absorb  all,  or  almost  all,  the 
manufacturer  can  produce,  relieves  the  manufac- 
turer of  all  marketing  worries  and  cuts  his  selling 
expense  to  a  negligible  figure. 

He  now  finds  himself  at  the  mercy  of  the  middle- 
man. He  may  protect  himself  by  marking  his  goods 
in  a  conspicuous  way  with  his  name,  and  by  attaching 
to  them  a  "trade-mark."  Once  he  has  begun  to  use 
this  distinguishing  mark  no  one  else  can  legally  make 
use  of  it.  In  this  way  the  manufacturer  may  gradu- 
ally build  up  a  good  will  for  his  products  with  the 
consumer,  and  the  middleman  may  be  compelled  to 
handle  the  products  in  order  to  satisfy  the  demand 
of  his  customers. 

But  the  danger  of  substitution  is  a  serious  one. 
The  middlemen  may  attempt  to  displace  the  articles 
with  those  of  another  manufacturer  who  quotes  more 
favorable  prices.    They  may  even  go  so  far  as  to  buy 


BUSINESS     ORGANIZATION  285 

unbranded  goods  and  to  mark  them  with  their  own 
trade-marks. 

The  manufacturer  may  protect  himself  to  a  large 
degree  against  this  tendency  by  entering  upon  an 
advertising  campaign.  In  other  words,  he  can  make 
his  appeal  directly  to  the  consumer.  Through  na- 
tional advertising  the  name  of  the  manufacturer  or 
his  trade-mark  becomes  at  last  associated  insepar- 
ably with  the  name  of  the  product.  When  we  speak 
of  shaving  soap  the  names  of  Colgate,  Mennen,  and 
Williams  at  once  come  to  our  minds.  The  word 
"rolled  oats"  at  once  suggests  Quaker.  Almost  all 
articles  of  daily  use  have  thus  become  associated 
with  trade-marks  and  manufacturers'  names  through 
national  advertising  campaigns. 

The  possibility  of  substitution  is  not  absolutely 
eliminated,  but  is  much  lessened  by  such  advertising. 
A  customer  who  asks  for  Colgate's  soap  usually  has 
made  up  his  mind  that  he  wants  that  soap  and  no 
other.  In  most  cases  he  will  go  to  some  other  store 
rather  than  accept  a  substitute.  He  has  learned  to 
have  confidence  in  the  honesty  of  the  maker.  The 
nationally  advertised  trade-mark  stands  for  abso- 
lutely uniform  quality  and  for  uniform  price.  It 
facilitates  his  shopping  for  he  need  not  exercise  his 
judgment  as  regards  quality  and  price.  He  will, 
therefore,  usually  look  with  suspicion  upon  any  at- 
tempt to  sell  him  what  he  did  not  ask  for.    Especially 


286  BUSINESS     ORGANIZATION 

SO  if  the  article  offered  as  a  substitute  bears  the 
trade-mark  of  the  retailer. 

The  retailer  who  is  thus  forced  to  sell  trade-marked 
goods  loses  much  of  his  former  importance.  He 
becomes  more  and  more  merely  a  distributing  agent 
of  the  manufacturer.  He  is  more  and  more  giving 
up  control  of  quality  and  price,  for  these  tend  to 
become  questions  of  selling  between  manufacturer 
and  consumer. 

The  retailer  continues  to  play  an  important  role, 
however.  The  judgment  exercised  in  the  selection  of 
goods,  the  attractiveness  of  the  store,  and  the  ef- 
ficiency of  its  service  continue  to  make  the  difference 
between  success  and  failure  in  retail  selling.  The 
retail  store  must  supplement  the  national  advertising 
of  the  manufacturer  by  local  advertising,  so  that 
buyers  will  know  that  his  store  carries  certain  brands 
of  goods.  A  knowledge  of  advertising  is  a  necessary 
part  of  the  equipment  of  a  retailer  as  well  as  of  a 
manufacturer.  The  next  chapter  will  be  devoted  to 
a  study  of  advertising  methods. 

Summary,  The  marketing  of  agricultural  products 
is  different  from  that  of  manufactured  goods.  In  the 
case  of  agricultural  products  the  producer  is  usually 
lost  sight  of.  Middlemen  handle  his  products  until 
the  consumer  is  reached.  Grading  of  these  products 
facilitates  handling  them  and  makes  it  possible  to 
establish  world  prices  for  them.  The  usual  steps  in 
the  marketing  of  these  products  are :  (i)  local  market 


BUSINESS     ORGANIZATION  287 

where  goods  leave  the  hands  of  the  producer,  (2) 
primary  market  where  goods  are  graded  and  sold  on 
exchanges,   (3)  export  or  sale  for  domestic  use. 

Manufactured  products  usually  pass  from  manu- 
facturer to  jobber,  or  wholesaler,  and  from  him  by 
way  of  the  retailer  to  the  consumer.  Retail  selling 
may  take  the  form  of  general,  specialty,  department, 
and  chain  store,  or  may  take  place  by  mail. 

The  manufacturers  are  endeavoring  to  make  them- 
selves less  dependent  upon  the  middlemen  by  creating 
a  consumer's  good  will  through  national  advertising. 
The  need  for  middlemen,  however,  continues  to  exist. 

REFERENCES 

C.  C.  Field.  Retail  Buying.   Harper  &  Brothers. 

G.  G.  Huebner.    Agricultural  Commerce.    D.  Appleton 

and  Company. 
L.  D.  H.  Weld.     The  Marketing  of  Farm  Products,   The 

Macmillan  Company. 
Ralph  Starr   Butler.     Marketing   Methods.     Alexander 

Hamilton  Institute. 

QUESTIONS  FOR  FURTHER  STUDY 

I.  Give  a  detailed  statement  of  the  jobber's  service 
to  society  and  draw  the  conclusion  whether  the  jobber 
should  or  should  not  be  dispensed  with  altogether. 

References:   Butler.   Chapters  XI,  XH. 
Field.    Chapter  II. 
Weld.     Chapter  I. 


288  BUSINESS     ORGANIZATION 

2.  Has  the  retailer  nothing  to  gain  from  handling  na- 
tionally advertised  goods? 

Reference:    Butler.    Chapter  X. 

3.  What  are  the  principal  factors  in  retail  competition? 
References:   Butler.    Chapter  V. 

Field.    Chapter  VIII. 
Weld.    Chapter  XX. 

4.  Describe  the  marketing  of  wheat. 
Reference:   Huebner.    Chapters  II,  III,  IV. 

5.  Describe  the  marketing  of  cotton. 
Reference:   Huebner.    Chapters  V,  VI. 

TEST  QUESTIONS 

1.  What  are  the  usual  channels  through  which  manu- 
factured goods  reach  the  consumer? 

2.  Will  the  competition  of  the  mail  order  house  drive 
the  country  stores  out  of  business? 

3.  What  arguments  can  you  give  which  are  in  favor 
of  a  manufacturer  carrying  on  a  national  advertising 
campaign  ? 

4.  What  are  the  competitive  advantages  resulting 
from  the  chain  store  organization? 


BUSINESS     ORGANIZATION  289 


CHAPTER  XTV 

SELLING  AND  ADVERTISING 

Selling  an  Important  Function.  The  relative  im- 
portance of  selling  as  compared  with  production 
has  much  increased  in  recent  years.  In  earlier 
days  goods  were  to  a  large  extent  produced  to  order. 
In  other  words,  the  need  existed  and  was  expressed 
before  the  goods  were  produced.  Selling,  therefore, 
was  of  little  importance.  The  traveling  merchants 
who  carried  the  goods  of  other  cities  or  of  other 
countries  were  real  salesmen,  but  their  trade  was  of 
small  importance  when  contrasted  with  the  trade  of 
the  domestic  producers. 

In  recent  days,  however,  as  a  result  of  the  intro- 
duction of  machinery  and  the  economies  resulting 
from  large  scale  production,  production  goes  on 
quite  independently.  The  problems  have  been 
reversed.  Formerly  the  problem  was  to  produce 
what  had  been  ordered.  Now  the  problem  is  to  sell 
what  has  been  produced.  The  ability  to  sell  limits 
the  size  of  the  factory. 

Manufacturer  and  Middleman  May  Co-operate  in 
Selling.  As  was  indicated  in  the  preceding  chapter, 
the  manufacturer  in  order  to  dispose  of  his  goods 
may  undertake  the  sales  campaign  himself,  or  he  may 
follow  the  usual  channels  of  jobber,  wholesaler,  and 


290  BUSINESS     ORGANIZATION 

retailer.  In  the  latter  case  he  does  not  necessarily 
leave  all  selling  efforts  to  the  middlemen.  The 
manufacturer  is  vitally  interested  in  securing  enthu- 
siastic co-operation  from  the  retailer.  The  manu- 
facturer wants  to  see  the  retailer  make  as  many 
sales  as  possible  and  will  frequently  aid  the  retailer 
in  disposing  of  his  goods.  This  aid  may  take  various 
forms.  It  may  consist  merely  in  supplying  the 
retailer  with  attractive  folders  which  explain  the 
nature  and  use  of  the  articles  to  the  consumer,  or 
the  manufacturer  may  send  the  retailer  a  generous 
supply  of  samples,  leaving  it  to  his  discretion  to  dis- 
pose of  them  to  the  best  advantage.  Again,  the 
co-operation  may  be  more  direct,  and  expert  window 
dressers  or  salesmen  may  be  sent  out. 

These  representatives  of  the  producer  travel  from 
town  to  town,  stopping  a  few  days  or  a  week  in  each, 
and  carry  on  intensive  sales  campaigns.  Strikingly 
arranged  window  displays  are  supported  by  adver- 
tisements in  the  local  papers.  The  customers  who 
enter  the  store  are  induced  to  witness  the  demon- 
strations by  the  factory  salesmen.  Apart  from  the 
immediate  results,  this  method  has  the  additional 
advantage  that  the  retailers,  after  witnessing  the 
methods  of  these  trained  representatives,  are  them- 
selves in  a  better  position  to  push  the  products  more 
vigorously. 

Advertising  as  an  Aid  in  Selling.  The  manufac- 
turers may  also  support  the  retailer  in  his  selling  by 


BUSINESS     ORGANIZATION  29I 

an  advertising  campaign.  This  campaign  may  take 
different  forms.  It  may  be  a  national  advertising 
campaign  of  short  or  of  long  duration,  with  little 
direct  relation  to  specific  localities,  or  the  manu- 
facturer may  in  his  national  campaign  establish  a 
definite  link  with  the  local  efforts.  The  manufac- 
turers may  arrange  with  the  retailer  for  special  dis- 
plays and  special  prices  during  some  one  day  or  week 
and  then  advertise  the  fact  nationally.  The  "Gerard 
Week,''  "Palm  Olive  Week,"  and  "Edison  Week" 
are  examples  of  this  method  of  co-ordinating  the 
national  with  the  local  sales  campaigns. 

In  order  to  aid  the  retailers  in  their  local  adver- 
tising campaigns,  the  manufacturer  may  prepare 
for  them  advertisements  to  be  inserted  in  the  local 
papers,  leaving  a  space  in  which  the  name  of  the  local 
dealer  may  be  inserted.  The  Hart  Schaffner  and 
Marx  clothing  firm  follows  this  method.  Many 
automobile  firms  also  make  use  of  this  method  to 
standardize  and  to  raise  the  quality  of  local  adver- 
tising. Sometimes  local  dealers  all  handling  the 
same  products  will  co-operate  in  their  advertising. 
The  Ford  agencies  in  some  of  our  larger  cities  do  this 
frequently.  The  car  is  advertised  and  at  the  bottom 
of  the  advertisement  a  list  of  the  dealers  appears. 

Advertising  and  Selling  Compared.  We  have  here 
referred  to  advertising  and  selling  and  have  pointed 
out  how  one  may  be  called  on  to  supplement  the 
other.    This  may  need  a  further  word  of  explanation. 


292  BUSINESS     ORGANIZATION 

The  salesman  in  the  store  meets  the  consumer  face 
to  face.  His  problem  is  to  adjust  his  arguments,  his 
selling  talk,  to  the  mentality  and  prejudices  of  the 
particular  person  with  whom  he  is  dealing.  Adver- 
tising is  really  a  selling  talk,  not  with  an  appeal  to 
one  particular  person,  but  to  a  class  of  persons.  The 
underlying  principles  which  determine  the  success  of 
a  selling  talk  in  the  case  of  the  salesman,  also  deter- 
mine the  success  of  an  advertisement. 

The  advertiser  has  a  somewhat  more  difficult  situa- 
tion to  cope  with.  The  salesman  has  a  flesh  and  blood 
person  before  him.  He  can  watch  the  effect  which  his 
words  have  upon  his  listener.  He  may  answer  ques- 
tions or  dispel  objections. 

The  writer  of  advertisements,  however,  addresses 
himself  to  an  imaginary  audience.  Many  advertise- 
ments fall  flat  because  they  fail  to  conceive  some 
definite  audience,  and  fail  to  direct  the  appeal  to  this 
group.  They  have  the  same  effectiveness  as  a  sales- 
man would  have  who  turned  his  back  upon  his 
customer  and  addressed  his  remarks  to  the  goods 
behind  the  counter.  Other  advertisements  are 
failures  because  they  are  weak  in  "selling  points." 
They  are  like  a  salesmaa  whose  entire  repertoire 
consists  of  a  few  stock  phrases  like :  "These  are  the 
best  you  can  buy  anywhere ;"  or,  "They  wear'm  a  lot 
this  season." 

Such  phrases  do  not  carry  conviction.  They  do  not 
awaken  a  desire  to  buy.    This  leads  us  to  the  real 


BUSINESS     ORGANIZATION  293 

test  of  a  salesman's  talk  and  of  an  advertisement. 
They  have  this  in  common,  that  they  should  arouse 
in  the  listener  or  in  the  reader  the  desire  to  buy,  and 
should  make  him  act  upon,  this  impulse.  This  last 
phase  is  quite  important  for,  unless  the  customer 
actually  buys,  all  efforts  are  wasted.  Both  a  sales 
talk  and  an  advertisement  should,  therefore,  lead  its 
audience  through  the  following  stages:  attention, 
interest,  and  action.  • 

Attention,  First  of  all,  the  attention  of  the  possible 
buyer  should  be  attracted.  The  salesman  will  fre- 
quently discover  that  the  customer  has  already  fixed 
his  mind  upon  a  certain  article.  In  such  cases  we 
may  say  that  attention  is  already  present  and  need 
not  be  awakened.  Where  he  finds  the  customer  unde- 
cided or  "just  looking  around,"  he  has  an  oppor- 
tunity to  show  real  salesmanship.  Once  the  attention 
has  been  aroused,  the  first  step  on  the  road  to  a 
successful  sale  is  made. 

This  may  sound  easy,  but  is  in  fact  a  most  delicate 
matter.  It  requires  tact  and  a  delicate  intuition  to 
approach  a  stranger  in  such  a  way  that  he  will  give 
his  attention.  _  It  is  possible  to  arouse  a  feeling  of 
resentment  in  a  customer  by  an  awkward  approach. 

In  advertisements  it  is  equally  important  to 
attract  the  attention  in  the  right  way  and  to  hold  it. 
But  attracting  the  attention  is  only  the  first  step  and 
relatively  simple.  It  is  easy  to  attract  attention 
in  a  printed  statement  as  it  is  Ccisy  to  attract  atten- 


294  BUSINESS     ORGANIZATION 

tion  when  addressing  a  person.  It  is  a  more  delicate 
matter  to  attract  a  sympathetic  attention  and  to 
arouse  the  willingness  to  listen  to  further  argu- 
ments. 

Interest.  It  is  necessary  to  arouse  an  interest  in 
what  you  have  to  say.  Many  advertisements  fall 
«hort  in  this  respect.  They  attract  the  attention  by 
some  freakish  means,  but  fail  to  arouse  interest. 
Usually  they  are  at  fault  in  that  they  attract  atten- 
tion by  means  that  have  no  connection  with  the 
article  to  be  advertised. 

As  an  example  we  may  take  the  picture  of  a  man 
pointing  his  finger  at  the  reader  while  large  letters 
address  themselves  to  him  with  the  words,  "You 
must  consider J^  This  method  of  arresting  the 
attention  of  the  reader  was  quite  common  at  one 
time.  It  is  offensive  and  is  poor  psychology.  Even 
in  the  case  where  the  reader  does  not  resent  being 
spoken  to  in  the  tone  of  a  command,  there  is  no 
connection  between  the  attention  attracting  device 
and  the  article  advertised.  The  same  words,  the 
same  pointing  finger,  may  direct  you  to  consider  the 
good  virtues  of  shoe  polish,  of  toothpicks,  or  of  a 
talking  machine.  That  is  the  reason  why  such  an 
appeal  is  not  effective.  The  reader  must  bridge  the 
gap  between  the  device  which  attracted  his  attention 
and  the  article  advertised,  or  the  message  which  the 
advertiser  hopes  to  "put  across."  A  large  percentage 
of  readers  will  never  bridge  this  gap. 


BUSINESS     ORGANIZATION  295 

The  same  principle  holds  true  in  the  selling  talk  of 
the  salesman.  A  salesman  may  work  his  way  into  an 
office  under  some  pretext  or  other,  but  unless  he  is 
successful  in  holding  the  attention  of  his  prospect 
when  the  article  in  question  is  shown,  his  visit  will 
be  a  failure.  A  carefully  planned  approach  will 
attract  the  attention  by  arousing  an  interest.  In 
other  words,  the  two  stages  will  blend.  In  the  case 
of  the  salesman  it  will  usually  mean  that  he  will  take 
the  very  first  opportunity  to  show  the  goods  he  is 
endeavoring  to  sell  with  some'  remark  which  will  at 
once  link  the  customer  to  the  goods  by  ties  of  self- 
interest. 

No  one  will  ever  buy  anything  until  he  feels  that 
his  pleasure,  comfort,  safety,  or  appearance  will  be 
benefited.  The  very  first  words  of  the  sales  talk 
must,  therefore,  be  calculated  to  awaken  in  the  mind 
of  the  customer  some  picture  of  himself  as  possessor 
of  the  goods.  The  appeal  must,  if  possible,  be  to  the 
imagination. 

In  an  advertisement  this  will  mean  that  the  best 
method  of  approach  is  by  some  attractive  picture 
showing  the  article  in  use.  An  auto  out  in  the  woods 
surrounded  by  beautiful  scenery  and  a  happy 
family  enjoying  a  ride;  a  nicely  dressed  woman 
handling  a  vacuum  sweeper  with  one  hand,  evidently 
enjoying  the  work — these  are  pictures  that  arouse  a 
sjnnpathetic  interest. 


296  BUSINESS     ORGANIZATION 

By  way  of  contrast,  it  may  be  effective  to  show, 
though  less  prominently,  some  unpleasant  alterna- 
tive. A  tired  family  on  a  hot  summer  day  pushing 
its  way  into  a  crowded  street  car  calls  up  memories 
of  disagreeable  experiences  which  the  auto  will 
forever  eliminate. 

A  picture  of  a  tired  woman  breathing  in  the  heavy 
clouds  of  dust  stirred  up  by  her  broom  will  make  a 
vacuum  sweeper  seem  more  desirable. 

By  this  same  type  of  subtle  suggestion  the  window 
display  of  a  store  may  appeal  to  the  imagination  of 
those  who  pass  by.  A  clerk,  by  gracefully  displaying 
an  article  may  also  make  it  easy  for  the  customer  to 
imagine  herself  in  possession  of  it.  In  other  words,  if 
possible,  the  interest  in  an  article  must  be  aroused  in 
such  a  way  that  the  interest  will  lead  naturally  to  the 
desire  to  possess  it. 

Both  in  the  sales  talk  and  in  the  advertisement,  the 
greatest  care  should  be  exercised  to  avoid  every- 
thing which  may  distract,  antagonize,  or  lead  the 
prospect  to  make  up  his  mind  that  he  does  not  care 
to  acquire  the  article. 

The  clerk  or  salesman  should  be  neatly  and  in- 
conspicuously dressed.  A  loud  necktie,  bright 
yellow  shoes,  or  a  soiled  collar  will  call  attention  to 
themselves,  and  the  customer  will  unconsciously 
focus  his  attention  upon  them.  Much  of  the  force  of 
an  otherwise  splendid  approach  and  selling  talk  will 
consequently  be  lost.     Careful  attention  to  minute 


BUSINESS     ORGANIZATION  297 

details  is,  therefore,  necessary  to  prevent  distrac- 
tion. 

Similar  care  must  be  exercised  to  avoid  setting  up 
antagonistic  trains  of  thought.  No  statement 
should  be  made  which  implies  that  some  valid  criti- 
cism might  be  made  of  the  article.  A  difference  in 
wording  may  often  make  an  appreciable  difference  in 
the  reaction  which  it  awakens,  though  the  thought 
conveyed  be  the  same. 

"This  is  much  cheaper"  may  lead  the  customer  to 
think  that  the  quality  will  also  be  "cheap."  It  is 
better  to  say,  "This  is  less  expensive."  It  is  better 
still  to  avoid  mentioning  the  price  until  the  desire 
has  been  fully  aroused  and  the  customer  is  ready  to 
buy.  It  is  dangerous  to  mention  price  early  in  the 
sales  talk,  for  the  mere  mention  of  the  price  may 
mean  a  sudden  dissipation  of  all  interest. 

Once  the  customer  has  accustomed  himself  to 
looking  upon  the  article  as  already  his;  once  he  has 
imagined  himself  as  the  proud  owner,  the  men- 
tioning of  the  price  may  for  a  moment  dull  his 
interest,  but  he  is  much  more  likely  to  be  carried 
along  by  his  own  desire  and  enthusiasm.  The  buyer 
should  be  led  to  make  up  his  mind  favorably.  He  will 
then  frequently  argue  himself  into  buying  the  article 
even  at  a  price  which  he  would  not  have  considered 
at  first. 

Meeting  Arguments,  The  best  way  to  meet  argu- 
ments is  to  avoid  them.    Few  people  remainipleasant 


298  BUSINESS     ORGANIZATION 

under  argument.  They  feel  a  sense  of  pride  in  their 
original  objection  and  will  often  resent  being  shown 
that  they  are  wrong.  The  rule  is,  therefore,  avoid 
arguments.  This  may  be  done  in  two  ways.  First 
of  all,  by  anticipating  the  objections.  This  necessi- 
tates, as  will  be  brought  out  later,  a  careful  study  of 
the  article  and  also  a  keen  sense  of  the  buyer's 
psychology. 

The  second  method  is  to  answer  the  objections 
pleasantly,  giving  the  buyer  full  credit  for  having 
such  a  keen  knowledge  of  the  goods,  and  to  demon- 
strate, if  possible,  the  lack  of  foundation  for  the 
criticism,  and  at  the  same  time  avoiding  contradict- 
ing the  customer. 

To  give  an  example,  suppose  you  are  selling  an 
automobile.  The  prospect  seems  interested,  but  he 
says,  "They  tell  me  it  is  no  good  on  hills."  Here  is  a 
chance  for  a  very  unfruitful  argument  which  can 
lead  nowhere,  and  which  may  only  cause  the  prospect 
to  feel  injured  because  his  word  is  doubted.  A  better 
way  than  to  argue  is  to  invite  the  prospect  to  try  out 
the  machine  on  any  hill  he  pleases. 

Where  Advertising  Differs.  The  writer  of  adver- 
tisements must  keep  all  these  matters  in  mind,  but 
his  is  again  a  more  difficult  task,  far  more  even  than 
the  salesman,  he  must  anticipate  objections.  Now  it 
is  a  fact  that  very  few  people  will  read  a  lengthy 
argument  about  anything.  The  advertising  writer 
is,  therefore,  forced  to  be  brief.     In  his  case  the  best 


BUSINESS     ORGANIZATION  299 

result  will  usually  be  obtained  by  picking  out  some 
one  feature  which  characterizes  his  product  and 
differentiates  his  from  all  others.  Or  he  may  select 
a  number  of  such  features.  But  in  such  a  case  it  is 
better  to  bring  out  but  one  of  them  in  any  one 
advertisement. 

He  may  advertise  his  as  the  comfort  car,  the  sen- 
sible car,  the  car  of  economy,  or  the  car  of  no  regrets, 
and  then  in  his  advertisement  explain  why  this 
machine  possesses  those  qualities  to  an  exceptional 
degree. 

One  advertiser  may  in  this  fashion  call  attention  to 
the  fact  that  his  razor  blades  need  no  stropping  or 
honing — a,  great  saving  in  time;  another  may  point 
out  that  his  patented  device  allows  the  shaver  to 
strop  a  blade  easily,  thereby  lengthening  the  life  of 
the  blade  and  insuring  superior  service — a.  great 
saving  in  money  and  an  increase  in  comfort. 

It  may  be  that  each  safety  razor  has  other  features 
which  commend  it.  It  may  be  that  the  compact- 
ness, the  beauty  of  its  lines,  the  superior  finish,  the 
exceptionally  heavy  silver  or  nickel  plating,  and  a 
number  of  other  good  characteristics  make  one  or  the 
other  of  the  razors  a  superior  instrument.  It  would 
be  poor  psychology,  however,  to  stress  too  many  good 
points. 

The  main  reason  for  this  lies  in  the  fact  that  the 
reader  of  the  advertisement,  unlike  the  customer  at 
the  store,  or  the  person  approached  by  the  traveling 


300  BUSINESS     ORGANIZATION 

salesman,  cannot  act  immediately  upon  his  decision. 
It  is,  therefore,  necessary  to  leave  a  clear-cut  impres- 
sion. This  can  only  be  achieved  when  the  attention 
is  concentrated  upon  one  or  a  few  striking  character- 
istics. 

Sometimes  when  advertising  an  article  about  which 
a  prejudice  is  known  to  exist  in  the  minds  of  the 
buyers,  this  prejudice  itself  may  form  a  most  effec- 
tive point  of  attack.  The  safety  razors  mentioned 
are  a  case  in  point.  No  stropping,  no  honing  have 
been  advertised  as  special  virtues  of  one  make.  This 
impression  which  has  been  created,  that  safety  razor 
blades  cannot  be  stropped  is  a  splendid  point  of 
attack  for  a  competing  brand.  All  that  is  necessary 
ig  to  point  out  that  no  one  can  expect  to  get  a 
comfortable  shave  without  stropping,  and  that  this 
particular  brand  of  safety  razor  makes  stropping 
easy. 

Another  example  is  found  in  the  methods  followed 
to  boost  the  sale  of  canned  milk.  This  product  is 
looked  upon  by  many  as  an  emergency  product,  only 
to  be  used  in  case  no  fresh  milk  is  obtainable.  The 
advertising  campaign,  therefore,  lays  emphasis  upon 
the  fact  that  it  is  cleaner,  richer,  more  uniform,  more 
convenient,  than  the  fresh  milk  supply,  and  urges  the 
readers  to  use  it  daily  for  drinking,  for  the  making  of 
ice  cream,  and  in  coffee,  tea,  and  other  drinks.  Never 
in  any  of  these  advertisements  is  the  suggestion  allowed 
to  creep  in  that  it  is  not  usually  thought  suited  for 


BUSINESS     ORGANIZ  A  T  I  O  N  301 

such  purposes.  All  suggestions  are  positive,  aJl  point- 
ing to  a  more  liberal  use  of  canned  milk. 

Advertisements,  with  the  exception  of  a  few 
cotnaining  coupons  or  inviting  the  reader  to  order 
by  mail*  do  not  intend  to  carry  the  reader  beyond 
the  point  where  he  desires  the  article.  The  adver- 
tisenient  must,  therefore,  leave  a  definite  and  clear- 
cut  impression.  Some  easily  remembered  and 
agreeable  thought  must  attach  itself  inseparably  to 
the  name  of  the  article. 

The  task  of  carrying  the  prospect  over  the  last  lap 
of  the  route  to  a  final  decision  and  to  definite  action 
must  usually  be  left  to  the  salesman  or  clerk.  It  is 
clear  that  the  salesman  must  start  his  selling  talk 
where  the  advertising  campaign  leaves  o£f.  It  is  a 
"car  of  economy" — that  can  be  taken  for  granted; 
this  conviction  brought  the  prospect  to  the  agent. 
Besides  this  outstanding  characteristic,  it  possesses 
many  others  equally  favorable. 

Action.  In  any  selling  situation  the  most  critical 
point  is  that  when  the  conventional  "sign  on  the 
dotted  line"  point  is  approached.  Most  sales  are  lost 
by  a  clumsy  handling  of  this  last  situation.  The 
moment  when  action  is  suggested  must  be  well 
chosen. 

Some  salesmen  have  a  happy  faculty  of  intuition 
which  enables  them  to  tell  almost  without  fail 
when  the  sale  is  made.  Others,  however,  antici- 
pate this  moment  and  lose  a  sale  by  arousing  in 


302  BUSINESS     ORGANIZATION 

the  prospect  the  feeling  that  someone  is  trying  to  sell 
him  something  he  does  not  want,  trying  to  "slip  one 
over  on  him,"  as  the  slang  expression  goes.  Others 
let  the  moment  pass.  They  made  a  sale  and  never 
knew  it.  This  mistake  is  quite  as  fatal  as  the  other 
for  the  salesman  will  find  himself  at  a  loss  what  to 
say  when  the  prospect  retraces  his  steps  and  brings 
up  some  old  objections  which  were  apparently  satis- 
factorily answered  earlier  in  the  interview.  . 

The  salesman  must,  therefore,  be  very  careful  to 
choose  the  right  moment  and  to  lead  the  customer  to 
action  without  arousing  his  suspicions.  A  carefully 
worded  question  which  implies  that  the  customer 
has  already  decided  to  buy  the  article  may  carry 
him  over  the  point  of  hesitation.  It  takes  a  strong 
decision  on  his  part  to  say,  bluntly,  "I  don't  want 
the  thing  at  all".  A  question  of  this  type  made  at 
the  right  time  is  likely  to  result  in  the  desired  action. 

Selling  is,  therefore,  not  as  simple  a  matter  as  some 
are  inclined  to  believe.  Neither  is  selling  a  natural 
gift.  To  be  sure,  some  persons  possessed  with  a  for- 
tunate presence,  a  fine  sense  of  tact,  an  intuitive 
sense  of  fitness,  make  better  salesmen  than  others, 
but  even  they  must  provide  themselves  with  know- 
ledge, if  they  wish  to  secure  maximum  results. 

Knowledge  of  the  Goods.  The  first  requirement  for 
a  successful  salesman  is  a  knowledge  of  the  goods. 
Nothing  destroys  so  quickly  the  confidence  of  the 
prospect  in  the  goods,  the  salesman,  and  the  firm,  as 


BUSINESS     ORGANIZATION  303 

when  he  discovers  that  the  salesman  does  not  know 
the  article  he  is  selling. 

A  knowledge  of  the  goods  will  allow  the  salesman 
to  point  out  quickly  those  qualities  which  will  appeal 
especially  to  the  particular  customer,  and  to  answer 
convincingly  any  possible  questions.  This  seems  al- 
most too  evident  to  need  any  further  explanation, 
and  yet  many  salesmen  venture  out  without  even  a 
rudimentary  knowledge  of  the  article  they  are  trying 
to  sell. 

As  a  rule,  the  traveling  salesman  is  better  equipped 
in  this  respect  than  the  retail  store  salesman.  Manu- 
facturers nowadays  are  training  their  salesmen  be- 
fore sending  them  out.  Many  of  them  maintain 
schools  in  which  the  salesmen  are  trained,  first  of  all, 
to  know  their  goods.  The  history  of  the  company, 
the  process  of  manufacture,  the  successive  improve- 
ments brought  in  the  product  as  a  result  of  experi- 
ence, the  reasons  for  certain  features  of  the  article,  the 
uses  that  may  be  made  of  it  are  all  studied  in  detail, 
and  trips  are  made  through  the  plant,  so  that  the 
salesman  may  learn  by  observation  the  problems  of 
its  manufacture.  Finally,  a  course  in  selling,  i.  e., 
in  the  making  of  a  convincing  sales  talk  is  given,  and 
the  salesmen  are  now  ready  to  go  on  the  road. 

Once  out  in  the  field,  they  are  not  left  to  them- 
selves. Usually  a  prize  is  offered  to  him  whose  sales 
reach  the  highest  total  during  a  given  period,  or — and 
this  is  fairer  to  all  concerned — to  him  who  reaches  or 


304  BUSINESS     ORGANIZATION 

excels  the  quota  for  his  territory.  In  order  to  aid 
the  salesmen  in  this  contest  and  to  encourage  them 
in  their  work,  many  large  concerns  provide  them  with 
a  sales  manual,  and  keep  in  constant  touch  with  them 
by  means  of  printed  or  mimeographed  talks,  letters, 
or  a  weekly  organ  which,  besides  the  records  of  the 
various  men,  gives  items  of  interest  about  the  fac- 
tory, and  about  national  and  international  events 
affecting  the  production  or  sale  of  the  article. 

The  National  Cash  Register  Company's  Sales 
Manual  consists  of  four  chapters:  (i)  Salesmanship; 
(2)  Approach;  (3)  Demonstration;  (4)  Closing  Ar- 
guments. Much  space  is  devoted  to  arguments 
which  salesmen  frequently  face,  and  answers  to  them 
suggested  by  successful  men  in  the  field.  This  Man- 
ual is  revised  from  time  to  time,  and  the  experience 
of  the  salesmen  is  incorporated  in  the  text. 

A  retail  salesman  should,  first  of  all,  endeavor  to 
know  his  stock.  A  clerk  who  does  not  know  his  stock 
works  under  a  decided  disadvantage.  He  cannot 
answer  questions  of  customers,  he  must  spend  a 
long  time  in  trying  to  find  goods,  often  searching  in 
vain  for  what  is  not  carried,  and  he  cannot  readily 
suggest  substitutes  when  the  article  asked  for  is 
not  in  stock. 

Next  in  importance  to  a  knowledge  of  stock  is  a 
knowledge  of  the  merchandise  itself.  A  clerk  who 
can  talk  about  his  goods  with  the  conviction  of  an 


BUSINESS     ORGANIZATION  305 

expert  will  at  once  secure  the  confidence  of  his  cus- 
tomer.   Knowledge  always  produces  confidence. 

The  educational  departments  of  many  of  the  larger 
stores  give  courses  in  textiles,  leather,  rubber,  and 
other  products,  thereby  enabling  the  clerks  to  ac- 
quire the  specialized  knowledge  which  they  need  in 
their  profession. 

One  important  point  must  be  brought  out  in  this 
connection.  All  selling,  if  it  is  to  build  good  will, 
must  be  based  upon  truth.  A  knowledge  of  the 
goods  will  enable  the  salesmen  to  tell  the  truth  about 
the  goods  they  sell.  Some  stores  make  the  policy  of 
the  store  to  sell  without  misrepresentation,  an  adver- 
tising point.  It  is,  indeed,  a  strong  advertising 
point,  well  calculated  to  build  lasting  good  will.  One 
large  eastern  store  has  a  permanent  reward  offered 
to  anyone  who  discovers  an  untruthful  statement  in 
the  advertising  matter  of  the  store. 

Knowledge  of  the  Buyer.  A  knowledge  of  the  goods 
must  go  hand  in  hand  with  a  knowledge  of  the  cus- 
tomer. More  and  more  the  "natural  bom"  ability  to 
sell  is  discredited,  and  selling  is  regarded  as  a  science. 
The  psychologists  have  recently  interested  them- 
selves in  a  study  of  selling  and  advertising,  and  have 
pointed  out  how  a  knowledge  of  the  processes  of  the 
human  mind  will  aid  one  in  leading  others  to  reach 
desired  conclusions.  A  study  of  the  way  in  which 
the  average  person  reaches  his  conclusions  will  enable 
the  writer  of  advertisements  to  avoid  many  of  the 


306  BUSINESS      ORGANIZATION 

pitfalls  of  this  difficult  art,  and  will  make  it  possible 
for  the  salesman  to  make  a  more  effective  approach. 

Many  stores  have  organized  classes  where  the 
sales  people  are  given  courses  in  the  psychology  of 
selling,  and  are  trained  to  watch  the  mental  processes 
of  others.  Through  demonstration  sales  these  lessons 
are  brought  home  to  them,  and  they  are  taught  to 
analyze  their  own  selling  method,  thereby  tracing 
the  probable  cause  for  their  failures.  Once  this  criti- 
cal attitude  of  mind  has  been  created,  half  the  game 
is  won.  Without  it  a  salesman  will  never  learn  from 
past  experience. 

It  must  not  be  thought,  therefore,  that  it  is  possible 
to  give  a  person  a  selling  talk  or  a  set  of  rules  that 
will  fit  all  occasions.  Every  sale  is  a  new  problem. 
But  it  is  possible  to  create  in  the  salespeople  a  reali- 
zation of  what  is  and  what  is  not  a  good  selling 
method,  and  to  arouse  in  them  that  critical  attitude 
of  mind  which  will  lead  them  to  approach  each  cus- 
tomer as  a  problem  to  be  solved,  and  to  adapt  their 
method  to  the  circumstances. 

The  Advertiser  Faces  Peculiar  Problems.  The 
writing  of  advertisements,  though  governed  by  the 
same  fundamental  principles  as  all  other  methods  of 
selling,  has  problems  of  its  own.  The  appeal  of  the 
advertisement  is  solely  through  the  eye.  Where  the 
salesman  should  be  trained  to  use  his  voice  correctly, 
to  eliminate  any  unpleasantness  of  speech,  the  writer 
of  advertising  copy,  on  the  other  hand,  should  learn 


BUSINESS     ORGANIZATION  307 

the  correct  use  of  type,  the  effect  of  different  colors, 
and  the  proper  layout  of  an  advertisement.  In  other 
words,  he  should  not  only  be  a  salesman  who  knows 
his  goods  and  his  customers,  and  who  understands 
the  psychology  of  selling ;  he  must  also  be  an  artist 
and  a  printer.  An  advertisement  may  contain  a 
splendid  selling  point,  may  be  worded  to  perfection, 
but  if  the  type  is  poorly  selected,  or  the  arrangement 
of  the  space  is  defective,  the  advertisement  will  still 
be  a  failure. 

Another  problem  is  faced  by  the  advertiser,  which 
does  not  exist  for  the  salesman.  He  faces  the  selec- 
tion of  a  medium.  A  number  of  possibilities  sug- 
gest themselves.  Magazines,  newspapers,  billboards, 
street  car  cards,  handbills,  circular  letters,  and  book- 
lets are  but  a  few  of  the  many  ways  advertising 
matter  may  be  placed  before  the  public. 

It  is  in  this  selection  of  the  medium  that  a  know- 
ledge of  the  product  and  of  the  possible  buyer  are 
important  elements.  These  will  enable  the  adver- 
tising manager  to  form  a  clear  picture  of  the  audi- 
ence he  wishes  to  reach,  and  of  the  most  effective 
method. 

Equally  important  is  a  knowledge  of  the  medium 
itself.  It  is  not  enough  that  a  medium  reaches  a 
large  number  of  people.  The  persons  reached  must 
be  possible  buyers.  A  careful  study  of  mediums  will 
quickly  lead  to  the  elimination  of  a  large  number  of 
them.     Take,  as  an  example,  a  make  of  talking 


308  BUSINESS     ORGANIZATION 

machines.  Surely,  no  one  would  select  handbills  as 
a  method  of  advertising  such  an  article.  The  possi- 
bility that  a  bill  would  reach  a  likely  buyer  is  very 
small,  and  even  if  a  certain  number  of  bills  found 
their  way  into  the  hands  of  possible  customers,  it  is 
very  doubtful  that  the  bill  would  be  read  by 
them. 

In  order  to  bring  out  the  desirability  of  owning  a 
talking  machine,  and  a  certain  make  in  preference  to 
all  others,  we  must  find  our  possible  buyer  in  a  read- 
ing mood.  He  must,  if  possible,  be  comfortably 
seated  so  that  he  may  easily  imagine,  as  he  reads  our 
message,  how  delightful  it  would  be  to  listen  to  some 
beautiful  melody.  In  other  words,  we  must  find  the 
customer  at  home.  A  street  car  card  or  a  billboard 
are  eliminated.  The  newspaper,  read  quickly  and 
then  laid  aside,  is  not  the  ideal  medium.  The  maga- 
zine read  in  moments  of  leisure  is  the  ideal.  It  is  by 
far  the  most  likely  to  be  read  in  home  surroundings, 
when  a  comparatively  long  period  of  leisure  is  set 
aside  for  entertainment.  The  right  type  of  magazine 
reaches,  moreover,  a  definite,  selected  audience,  with 
a  certain  standard  of  taste  and  purchasing  power. 
This  is  the  ideal  situation.  Now  picture  how,  without 
leaving  the  comfortable  chair,  one  may  listen  to  all 
the  great  artists  of  the  world;  how,  by  a  simple 
change  of  record,  one  may  listen  to  the  songs  of  child- 
hood, and  you  have  all  the  elements  of  a  successful 
setting  for  a  fruitful  advertising  talk. 


BUSINESS     ORGANIZATION  309 

The  selection  of  the  magazine  should  be  done  with 
care.  It  should  be  a  magcizine  read  by  people  who 
buy  talking  machines  of  the  type  we  have  to  sell. 
The  Saturday  Evening  Post,  the  Ladies  Home  Journal, 
and  many  others  like  them  at  once  suggest  them- 
selves, while  the  Red  Book,  Spicy  Stories,  and  The 
American  Boy,  for  obvious  reasons,  fall  outside  the 
range  of  possibilities. 

Local  Advertising.  The  local  retail  store  faces  a 
different  advertising  problem  from  that  of  the  manu- 
facturer. In  this  case,  the  object  of  the  advertise- 
ment is  frequently  not  so  much  to  create  a  desire  for 
an  article  as  to  call  attention  to  the  fact  that  a  certain 
store  carries  in  stock  a  well-known  article  which  may 
have  been  nationally  advertised. 

The  limited  extent  of  the  selling  territory  also  in- 
fluences the  selection  of  the  medium  and  the  method 
of  approach.  The  use  of  newspapers  and  of  street- 
car cards  is,  therefore,  quite  logical  and  effective. 
But  in  the  selection  of  the  newspapers,  care  should 
again  be  exercised  to  select  only  those  which  are  read 
largely  by  the  class  of  people  who  frequent  the  store. 

In  local  advertising  it  is  sometimes  possible,  and  in 
such  cases  frequently  advisable,  to  keep  a  careful 
record  of  the  effect  of  the  advertisements  on  sales,  so 
that  it  may  be  known  which  medium  brings  the  best 
results. 

This  is  very  difficult  in  national  advertising.  In 
national  campaigns,  which  mak^  use  of  the  order 


310  BUSINESS     ORGANIZATION 

coupon,  or  which  invite  the  reader  to  write  for  a 
catalogue  or  sample,  it  is  usual  to  give  as  the  address 
not  only  the  business  address  of  the  firm,  but  also 
that  of  a  department,  designated  by  a  letter  which 
differs  for  the  various  magazines  in  which  the  adver- 
tisement appears.  In  this  way  it  is  possible  to  deter- 
mine the  effectiveness  of  advertisements  in  different 
magazines. 

The  retail  store  is  best  able  to  test  the  value  of  a 
medium  when  advertising  a  special  sale.  This 
method  is  not  infallible,  since  many  outside  circum- 
stances enter  in  and  make  it  difficult  to  arrive  at  con- 
clusions. •  It  may  be  that  the  morning  hours  are  the 
best  shopping  hours  for  that  line  of  goods,  and  that 
a  violent  rainstorm  keeps  the  customers  at  home.  Or 
it  may  be  that  some  public  event  has  diverted  the 
attention  of  the  trade. 

In  order  to  obtain  the  greatest  efficiency,  the  sales- 
people of  the  store  should  be  encouraged  to  keep  in- 
formed of  the  goods  that  are  being  advertised  and  of 
the  special  selling  points  that  are  being  featured. 
Much  of  the  force  of  otherwise  effective  advertising 
is  lost  when  the  sales  force  is  ignorant  of  the  reason 
why  customers  come  to  the  store.  The  sales  people 
should  be  prepared  to  build  their  selling  upon  the 
advertisement,  and  to  show  the  customers  exactly 
what  they  ask  for.  Where  such  co-operation  between 
sales  force  and  advertising  policy  does  not  exist,  the 
impression  is  oftep  created  that  the  advertisement 


BUSINESS     ORGANIZATION  3II 

was  dishonest,  and  merely  a  scheme  to  induce  people- 
to  enter  the  store  in  order  that  other  goods  might  be 
sold  to  them. 

The  window  and  counter  displays  should  also  bear 
a  direct  relation  to  the  advertisements.  If  silks  have 
been  advertised,  silks  should  be  displayed.  The 
whole  store  should  be,  vso  to  say,  on  tiptoe  to  sell 
silks.  The  strong  suggestion  which  is  thus  created  in 
the  mind  of  the  customer  in  favor  of  silks  is  a  power- 
ful aid  in  selling. 

It  must  not  be  forgotten  that  in  the  case  of  retail 
selling,  failure  with  a  special  sale  may  have  bad 
financial  results.  If  the  goods  are  marked  down  and 
a  special  advertising  campaign  has  been  carried  on- 
to sell  them,  and  they  are  not  sold  during  the  inten- 
sive sales  period,  their  future  sales  value  is  much 
diminished.  Customers  remember  the  past  special 
sales  and  do  not  favor  left  overs  from  the  sale. 

Price  Maintenance,  A  rush  on  account  of  a  special 
sale  may  always  be  utilized  to  push  the  sale  of  other 
articles.  Special  sales  are,  therefore,  used  to  a  large 
extent  in  many  different  retail  lines.  Grocery  stores 
use  leads.  This  is  a  term  used  to  indicate  an  article 
placed  on  sale  at  a  low  figure,  sometimes  even  at  a 
loss,  in  order  to  attract  customers  in  the  hope  that 
they  will  buy  other  goods  upon  which  a  profit  is 
made. 

The  manufacturer  of  the  article  which  Is  sold  at  a 
reduction  does  not  look  upon  this  with  favor.    A  re-^ 


312  BUSINESS     ORGANIZATION 

duced  sale  may  have  a  bad  effect  on  the  local  market. 
It  may  mean,  if  such  sales  occur  frequently,  that  it 
will  become  impossible  to  sell  the  goods  at  the  normal 
retail  price,  and  that  other  retailers  will  begin  to  re- 
fuse to  handle  them. 

This  introduces  the  problem  of  price  maintenance 
of  nationally  advertised  articles.  This  question  has 
been  much  discussed  and  is  a  vital  issue  between  re- 
tailers and  manufacturers.  Many  retailers  are  in 
favor  of  fixed  prices  for  such  articles,  seeing  in  them 
a  protection  against  price  cutting.  Other  retailers, 
on  the  other  hand,  oppose  any  price  restriction. 

The  difficulty  of  avoiding  legal  entanglements 
when  making  price  agreements  with  retailers  has  led 
manufacturers  to  follow  a  safer  course,  and  to  appeal 
to  the  sense  of  fairness  and  to  the  self-interest  on  the 
part  of  the  dealers  to  gain  support  for  their  price 
maintenance  policy.  This  method  is  proving  more 
and  more  effective. 

The  Sales  Organization.  In  the  larger  manufactur- 
ing concerns  which  maintain  their  own  sales  organi- 
zation, selling  and  advertising  are  usually  grouped  in 
one  department.  This  is  usually  called  the  sales 
department,  and  consists  of  two  subdepartments, 
each  in  charge  of  a  manager;  the  sales  department 
proper  and  the  publicity  department  which  looks 
after  all  advertising  matters.  Where  the  factory  is 
not  large  enough  to  maintain  its  own  advertising 
department  it  may  employ  an  advertising  agency. 


BUSINEES     ORGANIZATION  313 

In  fact,  many  large  concerns  when  planning  an  un- 
usual or  extended  advertising  campaign  call  in  the 
advice  and  assistance  of  such  agencies. 

In  the  retail  store  the  management  of  the  sales 
force  is  frequently  in  the  hands  of  the  store  manager. 
The  floor  walker,  or  floor  manager,  occupies  a  posi- 
tion similar  to  that  of  the  foreman  in  the  factory.  He 
should  assist  the  sales  people  in  making  sales,  and 
should,  therefore,  be  selected  on  the  basis  of  his 
greater  knowledge  of  merchandise  and  his  superior 
sales  ability.  He  should  have  the  confidence  of  the 
salespeople,  and  be  looked  upon  by  them  not  as  a 
driver  or  policeman,  but  as  an  instructor. 

The  Buyer,  The  buyer,  discussed  in  the  chapter 
on  purchasing,  is  held  responsible  for  the  sale  of  the 
goods  which  he  buys  for  his  department.  The  sales 
force,  their  efliciency  and  control  are,  therefore,  of 
vital  concern  to  him,  and  he  is  usually  given  consider- 
able power  over  them. 

The  buyer  decides  which  goods  shall  be  advertised, 
he  gives  the  necessary  information  to  the  adveitising 
department,  he  arranges  for  window  displays  with 
the  window  display  department,  he  has  his  goods 
displayed  in  the  various  show  cases,  and  he  instructs 
the  sales  people  in  regard  to  the  selling  points  of  the 
goods  and  the  advertising  campaign.  He  makes 
recommendations  for  "mark  downs,"  special  sales, 
and  other  matters  of  store  policy  to  the  merchandise 
manager  to  whom  he  is  directly  responsible. 


3£4 BUSINESS     ORGANIZATION 

Summary.  Advertising  and  selling  are  funda- 
-mentally  subject  to  the  same  laws.  Their  differences 
arise  from  the  fact  that  advertising  has  a  more  gen- 
^€ral  bearing,  and  is  confined  to  the  written  word, 
while  salesmanship  deals  with  the  individual  and  the 
spoken  word.  In  making  a  sale  the  following  stages 
must  be  passed :  attention,  interest,  action.  Adver- 
tising and  salesmanship  complement  each  other. 
The  advertisement  arouses  the  interest,  but  the 
salesman  must  make  the  actual  sale.  A  good  sales- 
man must  know  his  goods,  his  customers,  and  must 
study  the  psychology  of  selling.  The  advertiser, 
moreover,  must  understand  the  art  of  printing  and 
must  know  how  to  select  the  right  medium. 

REFERENCES 

J.  W.  Fisk.    Retail  Selling.    Harper  &  Brothers. 

C.  C.  Field.    Retail  Buying.    Harper  &  Brothers. 

P.  H.  Nystrom.  The  Economics  of  Retailing.  The  Ronald 
Press  Company. 

P.  H.  Nystrom.  Retail  Selling  and  Store  Management. 
D.  Appleton  and  Company. 

E.  E.  Calkins.  The  Business  of  Advertising.  D.  Appleton 
and  Company. 

N.  A.  Brisco.  Fundamentals  of  Salesmanship.  D. 
Appleton  and  Company. 

H.  L.  Hollingworth.  Advertising  and  Selling:  Prin- 
ciples of  Appeal  and  Response.  D.  Appleton  and 
Company. 


BUSINESS     ORGANIZATION  3I5, 

P.  T.   Cherrington.     Advertising  as  a  Business  Force^ 
Doubleday,  Page  &  Company. 

QUESTIONS  FOR  FURTHER  STUDY 

I'.   How  is  the  selling  field  analyzed? 
Reference:   Fisk.    Chapter  I. 

2.  How  may  a  salesman   train   himself  for  greater 
efficiency? 

Reference:   Fisk.     Chapters  VI,  XI,  XII,  XIII. 

3.  Give  ten  reasons  why  a  salesman  should  know  his. 
merchandise. 

References:   Fisk.    Chapter  VIII. 
Field.    Chapter  XIII. 

4.  Go  to  some  retail  store  in  your  town  and  watch  a 
clerk  sell.  Describe  three  different  sales,  and  point  out 
where  the  clerk  succeeded  and  where  his  method  was 
weak. 

Reference:   Fisk.    Chapter  IX. 

5.  Describe  an  advertising  campaign  of  some  local 
store,  and  point  out  whether  there  was  efficient  co-opera- 
tion between  advertising,  displays,  and  selling. 

Reference:  Field.    Chapter  Xiy. 

TEST  QUESTIONS 

1.  What  are  the  three  stages  in  a  successful  sale? 

2.  What  knowledge  should  one  possess  in  order  to- 
become  a  successful  salesman? 

3.  What  additional  knowledge  is  necessary  in  order  to 
become  a  successful  writer  of  advertisements? 

4.  On  what  basis  should  the  advertising  medium  be 
selected? 


3l6  BUSINESS      ORGANIZATION 


CHAPTER  XV 

FOREIGN  TRADE 

Foreign  Trade  Necessary.  Many  articles  used  in 
our  everyday  life  are  the  products  of  foreign  lands. 
Coffee,  tea,  coco,  tobacco,  bananas,  and  spices;  a 
list  too  long  to  enumerate  shows  our  dependence 
upon  the  productivity  of  far  distant  lands.  And  not 
only  products  of  the  farm  or  mine,  but  manufactured 
products  are  imported  to  satisfy  the  needs  of  the 
American  market.  Matches  from  Japan,  laces  from 
France,  pottery  from  Scandinavia,  and  cutlery  and 
china  from  England  represent  but  a  few  of  a  large 
number  of  manufactured  products. 

On  the  other  hand,  America's  goods  are  finding 
their  way  into  the  markets  abroad.  In  the  early 
decades  of  America's  history  these  goods  were  prin- 
cipally products  of  the  mines  and  farms,  but  recently 
the  exports  have  begun  to  consist  largely  of  manu- 
factured goods,  shoes,  automobiles,  typewriters,  sew- 
ing machines,  and  other  products  of  our  factories. 

Foreign  trade,  therefore,  means  both  importing  and 
exporting.  In  fact,  as  every  elementary  text  on  eco- 
nomics undertakes  to  explain,  exports  and  imports 
cannot  exist  independently  of  each  other.  The  in- 
flow of  gold,  which  causes  prices  to  rise  in  countries 


BUSINESS     ORGANIZATION  317 

with  large  exports  and  small  imports,  makes  exports 
more  and  more  difficult,  and  places  a  greater  and 
greater  premium  on  imports.  Exports  and  imports, 
therefore,  will  tend  to  become  equal.  Where  a 
country  has  invested  large  sums  abroad  upon  which 
interest  is  due,  imports  may  continue  to  exceed  ex- 
ports by  that  amount.  If,  on  the  other  hand,  a 
country  owes  money  abroad,  either  In  the  form  of 
interest  upon  investments  made  by  foreign  financiers, 
or  on  account  of  freights  or  insurance  premiums  due 
foreign  companies,  the  exports  may  steadily  exceed 
imports.  Foreign  -  trade,  therefore.  Is  Influenced 
greatly  by  the  financial  relations  between  nations. 

The  Foreign  Traders,  Selling  Direct.  Manufac- 
turers who  desire  to  sell  In  foreign  markets  may  do 
so  directly  or  Indirectly.  If  they  decide  to  follow 
the  direct  method  they  may  send  their  own  repre- 
sentatives abroad,  build  their  own  foreign  selling 
organizations,  establish  branch  houses,  or  even  fac- 
tories abroad ;  in  short,  they  may  follow  the  methods 
they  follow  In  the  domestic  market  when  developing 
trade  Intensively.  Some  manufacturers  find  that 
only  by  handling  sales  and  sales  promotion  them- 
selves can  they  expect  to  build  up  an  active  demand 
for  their  goods.  It  may  also  be  that  their  goods  are 
so  highly  specialized  that  It  takes  experts  to  sell  them, 
to  explain  their  use  to  the  buyers,  and  to  make  adjust- 
ments and  repairs.     Such  goods  are  usually  best 


3l8  BUSINESS     ORGANIZATION 

handled  direct.  In  no  other  way  can  a  manufacturer 
be  sure  that  his  customers  get  the  proper  service. 

Before  undertaking  these  direct  relations  a  manu- 
facturer must  count  the  cost.  It  requires  a  large 
capital  investment  and  a  large  working  fund  to  de- 
velop foreign  markets.  Not  that  it  requires  neces- 
sarily more  than  it  would  take  to  develop  a  domestic 
market,  but  returns  are  likely  to  come  more  slowly 
at  first.  The  salesman  and  other  employees  usually 
must  be  better  paid  than  those  who  handle  domestic 
sales.  Only  large  firms,  therefore,  with  ample  funds 
can  afford  to  follow  the  direct  method.  The  Singer 
Sewing  Machine  Company,  the  National  Cash  Reg- 
ister Company,  the  International  Harvester  Com- 
pany, and  many  other  large  manufacturing  concerns 
sell  abroad  largely  by  that  method.  But  even  they 
find  it  occasionally  necessary  to  depend  upon  middle- 
men. In  order  to  cover  a  territory  completely,  they 
often  find  it  necessary  to  deal  through  firms  which 
handle  a  large  variety  of  products.  It  will  not  pay 
the  Singer  Sewing  Machine  Company  to  establish  a 
retail  store  to  sell  direct  to  consumers  in  a  place 
where  only  one  or  two  machines  are  sold  each  year. 
A  certain  minimum  of  sales  must  be  assured  to  justify 
the  expenditures  resulting  from  branch  houses. 

Selling  through  Middlemen.  The  smaller  manufac- 
turer cannot  very  well  undertake  to  develop  his  for- 
eign market.  He  does  not,  as  a  rule,  possess  the 
necessary  surplus  funds*  to  invest  in  an  extended 


BUSINESS     ORGANIZATION  3I9 

foreign  campaign.  It  may  be  that  he  has  enough 
capital  available  to  develop  the  market  in  one  sec- 
tion, but  he  lacks  the  means  of  entering  equally  profit- 
able fields  elsewhere.  In  such  cases,  the  services  of 
three  classes  of  middlemen  are  available  to  him.  He 
may  deal  through  an  export  merchant  or  through  an 
export  commission  man,  who  maintains  offices  in  this 
country,  or  he  may  select  some  reliable  representative 
among  the  many  local  firms  in  the  foreign  market. 

An  export  merchant  buys  and  sells  goods  on  his 
own  account.  He  buys,  say,  from  an  American  firm 
and  sells  as  best  he  can  to  foreign  firms.  The  export 
commission  house  does  business  on  a  different  basis. 
It  buys  goods  from  manufacturers  only  after  it  has 
received  an  order  from  a  foreign  buyer.  In  placing 
the  order,  the  commission  house  legally  acts  as  agent 
for  the  foreign  house  and  not  on  its  own  account. 
This  is  quite  an  important  distinction.  A  manufac- 
turer may  approach  an  export  merchant,  by  sending 
a  salesman  to  interview  him,  and  persuade  him  to 
buy  his  goods.  The  merchant  will  then  have  to 
exert  himself  to  sell  them  abroad. 

The  export  commission  house,  however,  does  net 
buy  in  that  way.  If  approached,  the  export  commis- 
sion man  might  answer:  "All  right,  get  my  foreign 
customers  to  order  the  goods,  then  I  shall  place  the 
order  with  you."  In  many  cases,  the  foreign  custo- 
mer indicates  the  manufacturer  from  whom  the  goods 
must  be  purchased.     In  such  cases  the  commission 


320  BUSINESS     ORGANIZATION 

house  must  follow  instructions.  When  the  foreign 
buyer  orders  articles  without  indicating  the  place 
where  they  should  be  bought,  the  commission  house 
may  place  the  order  anywhere,  always  provided  that 
the  interests  of  its  principal  are  properly  served.  In 
such  cases,  the  manufacturer  may  successfully  solicit 
an  order. 

The  only  way  a  manufacturer  can,  therefore,  push 
sales  through  export  commission  houses  is,  as  a  rule, 
by  advertising  in  the  foreign  market  himself,  and  by 
filling  the  orders  that  are  placed  through  commission 
houses.  This  is  not  satisfactory.  There  is  always  a 
great  temptation  on  the  part  of  the  middlemen  to 
substitute  just-as-good  articles ^  the  manufacturers  of 
which  have  shown  them  favors  in  the  past. 

Many  commission  houses  are  beginning  to  make 
agreements  with  manufacturers  to  push  their  goods 
actively  in  certain  markets.  This  aid  is  not  given 
free  of  charge.  A  commission  is  charged  to  the  manu- 
facturer on  all  sales  and  the  manufacturer  is  ex- 
pected to  share  to  some  extent  the  expenses  of  market 
development.  In  such  a  case,  the  commission  house 
becomes  the  agent  of  the  seller  and  should  not  charge 
commission  to  the  buyer  also. 

The  method  of  selling  through  local  agents  in  for- 
eign markets  has  many  advantages  and  also  many 
dangers.  The  advantages  are  chiefly  that  the  local 
representative  can  give  information  about  conditions 
and  can  follow  up  customers  and  prospects,  and  that 


BUSINESS     ORGANIZATION  32 1 

the  manufacturer  can  leave  the  developing  of  the 
market  largely  to  the  representative,  who  will  also 
attend  to  collection  and  assure  the  buyers  the  neces- 
sary service. 

It  is  Necessary  to  Study  the  Market,  The  American 
business  man  has  not  devoted  much  attention  to  a 
study  of  foreign  markets.  He  has  been  too  busy 
studying  the  local  market.  Foreign  countries  may 
have  interested  him  as  a  place  to  spend  his  vacation, 
but  as  a  selling  field  they  did  not,  until  recently, 
attract  his  attention.  The  fact  that  most  of  our 
exports  were  for  a  long  time  agricultural  products 
has  been  in  part  responsible  for  the  lack  of  attention 
that  has  been  paid  to  foreign  markets.  Agricultural 
products  sell  themselves.  Their  price  is  usually  a 
world  price  and  their  quality  is  fairly  well  standard- 
ized. They  move  naturally  wherever  the  need  ex- 
ists. They  are  dealt  in  on  the  exchanges  and  are  sold 
by  brokers  or  commission  men,  whose  only  sales 
organization  is  an  office  near  the  exchange. 

Selling  manufactured  products  is  a  different  mat- 
ter, here  competition  exerts  itself  in  its  most  severe 
fortn.  Price,  quality,  and  service  are  all  factors 
which  influence  the  decision  of  the  buyer.  Fre- 
quently such  products  supply  a  need  which  must 
first  be  awakened,  as  in  the  case  of  most  luxuries.  To 
sell  such  goods  demands  a  thorough  knowledge  of  the 
market  and  a  knowledge  of  the  goods  combined  with 
selling  ability. 


322  BUSINESS      ORGANIZATION 

Before  venturing  upon  a  foreign  selling  campaign 
the  characteristics  of  the  people  and  their  habits  and 
customs  should  be  studied  so  that  the  appeal  may- 
be worded  in  terms  which  they  will  understand  and 
like.  The  dignified  and  impersonal  advertisements 
common  abroad  would  be  ineffective  with  American 
readers.  Their  appeal  is  not  definite  enough  and 
they  fail  to  arouse  the  active  interest  of  the  pro- 
spective buyer.  On  the  other  hand,  the  snappy 
advertisements  with  a  note  of  command  in  them  to 
"sign  here  and  now"  have  an  equally  unpleasant 
effect  upon  foreign  readers.  They  like  to  be  asked 
to  "please  write  for  further  information."  They 
resent  being  ordered  to  do  so. 

These  examples  illustrate,  of  course,  very  elemen- 
tary truths.  They  indicate,  however,  that  a  pre- 
liminary study  is  necessary  and,  above  all,  they  indi- 
cate that  it  makes  little  difference  what  we  think  or 
believe  to  be  the  best  thing,  if  we  want  to  sell  in 
foreign  fields  we  must  follow  the  same  principle  as  in 
the  domestic  market — satisfy  our  customer  by  selling 
him  what  he  wants  in  the  way  he  wants  it,  and  not 
by  trying  to  sell  him  what  we  think  he  should  want. 

A  careful  study  should  be  made  of  the  purchasing 
power  of  the  market.  The  density  of  population, 
the  character  of  the  cities,  architecture  of  the  houses, 
the  condition  of  the  roads,  all  these  factors  play  an 
important  part. 


BUSINESS      ORGANIZATION  323 

The  Tariffs  Must  Be  Studied.  The  customs  tfariff 
and  the  way  in  which  it  is  administered  must  also 
be  carefully  studied,  for  this  combined  with  the 
other  charges,  transportation,  and  insurance  will 
determine  what  the  cost  to  the  consumer  of  the 
goods  will  be.  It  may  not  always  prove  a  simple 
matter  to  get  information  about  tariffs.  In  this,  as 
in  many  other  cases  where  information  is  desired,  it 
is  best  to  make  use  of  the  many  public  and  private 
information  services. 

Private  Sources  of  Information.  Much  valuable 
information  in  regard  to  tariffs  and  trade-mark  laws 
in  foreign  countries  and  also  in  regard  to  the  methods 
of  packing  and  the  making  of  shipments  may  be 
obtained  through  the  foreign  trade  bureaus  of  the 
various  chambers  of  commerce.  Many  of  these 
chambers  maintain  libraries  where  the  standard 
books  on  foreign  trade  subjects  and  the  best  export 
magazines  may  be  found,  and  also  maps,  government 
bulletins,  and  directories  of  foreign  cities.  Some  of 
these  bureaus  publish  weekly  or  monthly  foreign 
trade  letters  which  give  interesting  and  vital  infor- 
mation about  conditions  and  events  in  foreign 
markets. 

Chambers  of  commerce  are  primarily  designed  to 
serve  a  city  or  a  certain  section  of  the  country. 
There  are  a  number  of  organizations  which  are  wider 
in  their  scope  and  which  serve  the  interests  of  all 
who  care  to  become  members  or  of  manufacturers  of 


324 BUSINESS     ORGANIZATI  O  N 

certain  articles.  Such  organizations  are,  among 
others,  the  National  Lumber  Exporters  Association 
and  the  New  England  Shoe  and  Leather  Association. 
The  most  powerful  national  organizations  are  the 
American  Manufacturers  Export  Association  and  the 
National  Association  of  Manufacturers. 

Much  printed  material  is  published  by  these  organ- 
izations; one  of  the  best  known,  Export  American 
Industry,  is  published  by  the  National  Association 
of  Manufacturers  which  also  publishes  The  American 
Trade  Index,  which  is  a  list  of  the  members  with 
their  addresses  and  condensed  information  regarding 
their  business. 

Banks  Promote  Trade,  Banks  which  are  interested 
in  financing  foreign  business,  offer  their  clients  much 
valuable  aid  in  gaining  a  better  knowledge  of  foreign 
markets.  Many  of  them  maintain  a  foreign  trade 
department  which  answers  questions  relating  to  the 
export  and  import  business  and  publishes  daily  or 
weekly  bulletins  giving  information  regarding  com- 
mercial events  abroad.  The  banks  secure  this  infor- 
mation in  part  from  their  correspondents  and  branch 
establishments  in  foreign  cities. 

Commercial  Museums.  Another  reliable  source  of 
information  is  found  in  the  Philadelphia  Commercial 
Museum.  This  is  an  institution  supported  by  the 
City  of  Philadelphia  and  the  State  of  Pennsylvania. 
It  has  wonderful  exhibits  of  products  from  all  parts 
of  the  world,  showing  the  processes  by  which  they 


BUSINESS     ORGANIZATION  325 

are  produced  and  the  use  made  of  them.  This  same 
museum  maintains  an  information  bureau  which  is 
prepared  to  advise  business  men  in  regard  to  the 
many  problems  of  foreign  trade. 

From  these  sources  a  business  man  can  receive 
answers  to  his  many  questions,  and  advice  in  the 
solving  of  his  problems.  Many  of  these  organiza- 
tions are  able  to  bring  him  in  touch  with  firms  abroad 
which  handle  his  class  of  products,  or  which  are  in- 
terested in  experimenting  with  them.  They  also 
offer  the  services  of  expert  translators  who  will 
undertake  for  a  moderate  fee  the  translating  of 
letters,   catalogues,   and  advertising  matter. 

Government  Sources  of  Information,  More  impor- 
tant even  than  these  sources  of  information  is  the 
service  which  the  United  States  Government  places 
at  the  disposal  of  business  interests. 

Consuls  in  practically  every  important  city  of  the 
world  are  in  constant  touch  with  the  officials  in  Wash- 
ington, and  the  reports  which  they  send  in,  after 
being  edited  and  condensed,  appear  in  the  Commerce 
Reports  which  are  issued  daily  by  the  Bureau  of 
Foreign  and  Domestic  Commerce  and  may  be  re- 
ceived regularly  by  anyone  who  is  willing  to  pay 
$2.50  a  year. 

J^o  business  man  interested  in  foreign  trade  can 
afford  to  ignore  these  reports.  They  contain  the 
latest  information  regarding  tariff  regulations,  steam- 
ship lines,  banks,  expositions,  and  many  other  sub- 


326  BUSINESS     ORGANIZATION 

jects  of  interest  to  the  foreign  trader.  A  list  of  Trade 
Opportunities  appears  on  the  last  page  of  these  re- 
ports. Special  Consular  Reports  appear  from  time 
to  time,  giving  information  gathered  upon  some 
special  topic.  One  such  report,  for  instance,  deals 
with  public  markets,  another  with  port  facilities. 
The  Special  Agent  Series  is  another  set  of  pamphlets 
issued  by  the  Bureau.  These  are  reports  prepared 
by  the  special  agents  of  the  Bureau  of  Foreign  and 
Domestic  Commerce  and  deal  with  such  topics  as 
the  hardware  market  in  Australia  or  the  shoe  indus- 
try in  Great  Britain. 

The  Bureau  maintains  a  number  of  branch  offices 
in  many  of  the  larger  cities  of  the  United  States,  and 
in  others  it  co-operates  with  local  chambers  of  com- 
merce by  supplying  regularly  all  publications  of  the 
Bureau,  and  by  placing  at  the  disposal  of  the  business 
men  additional  trade  information  held  for  distribu- 
tion in  Washington. 

Miscellaneous  Government  Aid  The  government 
aids  foreign  trade  in  many  other  ways.  Merchants 
who  import  goods  subject  to  import  duties  may  post- 
pone payment  of  the  duty  and  store  the  goods  in 
bonded  warehouses.  In  case  the  goods  are  exported, 
no  duty  is  paid  at  all.  If,  however,  the  goods  are 
finally  allowed  to  enter  the  United  States^  duties  will 
have  to  be  paid.  This  means  a  great  saving  to  the 
merchants,  for  in  this  way  they  are  not  compelled  to 
tie  up  their  funds  in  paying  duties  until  ^^e  goodis  ar^ 


BUSINESS     ORGANIZATION  327 

actually  released  for  home  consumption,  and  by  that 
time  they  may  have  been  sold  to  others. 

The  restrictions  on  the  use  of  these  warehouses 
limit  their  use  to  comparatively  few  cases.  It  is  now 
proposed  to  establish  free  zones  or  free  ports  on  both 
the  Atlantic  and  Pacific  coasts.  Such  free  ports  are 
an  enlargement  of  the  bonded  warehouse.  They  are 
bonded  areas  in  which  manufacturing,  repacking,  and 
reshipment  may  take  place.  The  goods  re-exported 
never  pay  duty.  Only  goods  which  cross  the  line 
into  the  United  States  customs  territory  pay  duty. 
Such  zones  have  existed  for  years  abroad  and  have 
proved  to  be  a  great  aid  in  foreign  trade. 

The  Federal  Government  has  also  taken  an  inter- 
est in  education  for  foreign  trade.  The  Federal 
Boaird  for  Vocational  Education  has  issued  a  pamph- 
let called  Vocational  Education  for  Foreign  Trade  and 
Shipping,  which  gives  outlines  and  references  for 
courses  in  foreign  trade  for  high  schools  and  colleges, 
and  which  may  also  be  used  as  guides  for  further 
study. 

Combination  for  Export  Trade,  Since  the  develop- 
ment of  some  markets  requires  much  capital  and 
specialized  knowledge,  small  firms  find  it  almost  im- 
possible to  engage  actively  in  foreign  trade.  By 
combining  their  resources,  many  small  concerns  may 
be  enabled  to  employ  a  few  able  men  at  high  salaries 
who  can  build  an  active  foreign  demand.  The  ex- 
pense of  a  good-sized  selling  organization,  though 


328  BUSINESS     ORGANIZATION 

high,  when  distributed  over  a  number  of  firms  does 
not  mean  a  heavy  burden  on  any  one  of  them.  Such 
combinations  are  now  permitted  under  the  Webb- 
Pomerene  Act,  which  became  a  law  in  191 8.  Prior 
to  this  law  all  combinations  among  competing  firms 
were  illegal  as  a  result  of  the  provisions  of  the  Sher- 
man Anti-Trust  Law  of  1890,  the  Wilson  Tariff  Act 
of  1894,  and  the  Clayton  Anti-Trust  Law  of  19 14. 

In  other  countries,  more  especially  in  Germany, 
combinations  were  encouraged  by  the  governments 
which  were  anxious  to  promote  export  trade.  The 
American  exporters  were,  therefore,  somewhat  at  a 
disadvantage.  The  new  law  permits  combinations 
for  export,  but  has  been  much  criticized  for  not  per- 
mitting the  same  freedom  of  action  in  import  trade. 
A  number  of  other  minor  criticisms  have  been  made 
of  the  Act  and  it  may  be  expected  that  a  revision 
will  soon  be  made,  and  that  the  revised  bill  will  in- 
clude importing. 

Protection  of  Trade-Marks.  An  important  matter 
which  American  exporters  often  overlook  is  the  regis- 
tration of  trade-marks.  All  civilized  countries  pro- 
vide for  their  registration,  and  once  the  trade-mark 
has  been  duly  registered,  the  law  protects  the  rights 
of  the  one  who  has  registered  the  mark. 

The  question,  who  has  the  right  to  register  a  mark, 
is  not  answered  in  the  same  way  in  all  countries. 
Some  countries  consider  prior  use  as  the  real  mark 
of  ownership;  others  consider  the  act  of  prior  regis- 


BUSINESS     ORGANIZATION 329 

tration  the  final  proof  of  ownership.  The  result  is 
that  in  some  countries  men  who  have  no  intention  of 
using  certain  well-known  trade-marks  register  them 
in  order  to  prevent  the  foreign  manufacturers  who 
originated  them  from  using  them  in  their  markets. 
Usually  such  persons  are  willing  to  sell  their  rights 
acquired  in  this  piratical  way  for  a  good  sum  to  the 
real  owners  of  the  mark.  In  order  to  avoid  such 
conditions,  the  American  manufacturer  should  regis- 
ter his  mark  in  foreign  markets  even  if  he  has  no 
immediate  intention  of  entering  them. 

Advertising  in  Foreign  Markets,  Advertising  has 
not  been  developed  to  the  same  degree  abroad  as  it 
has  in  the  United  States.  A  lavish  use  of  advertising 
space  may  create  an  unwished-for  impression.  The 
foreign  consumer  frequently  feels  that  an  article 
which  can  bear  such  enormous  advertising  expense 
is  probably  selling  far  above  its  normal  price.  It  is, 
therefore,  best  to  follow  custom.  Though  American 
methods  may  undoubtedly  be  used  abroad  they 
should  be  used  judiciously.  A  careful  study  should 
be  made  of  the  selection  of  papers  and  magazines,  for 
these  have  a  much  more  sharply  defined  class  appeal 
than  similar  publications  in  this  country. 

Many  manufacturers  send  their  catalogues  to 
American  consuls  abroad.  This  is  a  good  thing  but 
it  would  be  unwarranted  to  expect  big  results.  Con- 
suls cannot  carry  on  an  active  campaign  for  anyone, 
and  can  only  answer  queries  that  come  to  them. 


330  BUSINESS     ORGANIZATION 

The  Sample  Fair,  Recently  the  old  "fair"  has  been 
revived  in  Europe,  and  the  American  manufacturers 
will  do  well  to  acquaint  themselves  with  its  features. 
A  fair,  or  sample  fair,  is  a  gathering  of  representatives 
of  manufacturing  concerns  who  bring  samples  for 
the  inspection  of  visiting  buyers.  Such  fairs  bring 
together  a  large  number  of  sellers  and  buyers  and 
make  it  possible  for  exporters  and  importers  to  place 
their  orders  without  traveling  over  long  distances  to 
visit  each  plant  individually.  Prior  to  the  war,  only 
two  such  fairs  of  international  importance  existed, 
the  Leipzig  Fair  in  Germany,  and  the  Nizhni  Nov- 
gorod Fair  in  Russia.  Both  of  them  originated  sev- 
eral centuries  ago  when  such  periodic  fairs  were  the 
only  way  in  which  international  trade  could  effec- 
tively be  carried  on.  At  the  time  of  such  fairs  the 
princes  or  lords  agreed  to  allow  traveling  merchants 
free  and  safe  passage  to  and  from  the  market  places. 
This  was  called  "market  peace,"  for  war  was  in  those 
days  the  normal  condition  of  society.  Those  early 
merchants  carried  with  them  their  entire  stock  of 
goods,  but  they  would  accept  orders  to  be  filled  at 
the  next  market  which  usually  took  place  every  six 
months. 

As  the  goods  became  more  standardized  so  that 
buying  by  sample  and  description  became  pos- 
sible, the  fairs  gradually  disappeared  and  those  that 
remained,  with  the  exception  of  Leipzig  and  Nizhni 
Novgorod  had  only  local  significance.     Russia,  be- 


B  us  I  NESS     ORGANIZATION 33I 

cause  of  its  poor  roads  and  long  distances,  still  has  a 
large  number  of  such  local  fairs. 

Since  the  war  began  many  fairs  have  been  opened 
and  they  have  all  become  permanent  institutions. 
The  goods  sold  there  are  all  of  a  type  which  must  be 
inspected  closely  before  they  are  purchased,  machin- 
ery, laces,  pottery,  and  furs  are  all  in  this  class.  The 
most  important  modem  fairs  are  those  of  Lyons,, 
Bordeaux,  Paris,  London,  Glasgow,  Utrecht  (Hol- 
land), and  Goteberg  (Sweden). 

How  Goods  Are  Quoted.  When  entering  a  foreign 
market  the  salesman  and  his  principal  should  make 
a  careful  study  of  the  customs  of  the  market.  Na 
one  who  did  not  know  the  hardware  trade  in  this 
country  would  expect  to  make  many  sales  until  he 
had  first  learned  how  dealers  usually  buy  their  goods, 
what  terms  they  ask,  and  how  payment  is  usually 
made.  The  same  thing  is  true,  of  course,  in  a  foreign 
market.  Customs  in  markets  differ  greatly.  Wheat 
in  the  United  States  is  quoted  and  sold  in  cents  per 
bushel,  in  France  in  centimes  per  kilo,  in  British 
India,  however,  the  quotation  indicates  how  many 
sers  can  be  obtained  for  one  rupee. 

The  first  thing,  therefore,  is  to  learn  the  systems  of 
weights  and  measures  and  the  coinage  systems  used. 
The  next  step  is  to  learn  the  methods  of  quoting. 
Various  methods  may  be  followed.  Some  goods  are 
always  sold  f.  o,b.  port  of  exportation.  This  means 
that  the  goods  are  delivered  free  on  board  of  the 


332  BUSINESS     ORGANIZATION 

vessel  and  that  all  further  expenses,  such  as  transpor- 
tation and  insurance  must  be  paid  by  the  buyer.  It 
is  more  convenient  for  the  buyer  and,  therefore,  good 
business,  to  quote  c.  i.  f.  This  means  cost,  insurance, 
and  freight  included.  The  buyer  may  then  know 
what  the  goods  will  cost  when  they  arrive  at  the  port 
of  importation.  Sometimes,  and  this  occurs  fre- 
quently in  Europe,  quotations  read  free  godown  or 
free  warehouse.  This  means  that  the  price  quoted 
includes  all  expenses,  even  the  cartage  to  the  ware- 
house of  the  buyer. 

American  firms  sometimes  do  not  recognize  suf- 
ficiently the  importance  of  making  it  easy  for  the 
buyer  to  figure  what  the  goods  will  cost  him,  and  are 
too  much  inclined  to  quote  f .  o.  b.  New  York,  leaving 
the  buyer  very  much  in  doubt  as  to  what  additional 
expenses  are  likely  to  accumulate. 

Methods  of  Payment,  A  not  uncommon  way  of 
quoting  is  "cash  New  York."  This  means  that  the 
goods  are  not  dispatched  until  the  cash  has  been  re- 
ceived. It  takes  little  imagination  to  see  the  objec- 
tions to  this  method  of  demanding  payment.  The 
buyer  is  expected  to  pay  before  he  has  been  able  to 
inspect  the  goods  and  long  before  he  receives  them. 
Such  terms  are  considered  insulting  by  well-estab- 
lished foreign  firms. 

Cash  against  documents  (d  /c)  or  Documents  against 
payment  (d/p)  is  another  common  quotation.  This 
means  that  the  documents  are  handed  over  by  the 


BUSINESS     ORGANIZATION  333 

bank  to  the  consignee  only  after  he  has  paid  a  draft 
for  the  amount  of  the  invoice.  This  amount  the 
bank  then  transmits  to  the  exporter  or  to  the  Ameri- 
can bank  which  bought  the  draft  from  him.  The 
documents  referred  to  will  be  discussed  more  in  de- 
tail in  the  following  chapter.  The  most  important 
document  is  the  hill  of  lading  (B  /  L) ,  which  is  a  re- 
ceipt issued  by  the  steamship  company  for  the  goods 
and  which  is  the  only  document  by  means  of  which 
ownership  of  the  goods  can  be  transferred.  Or  it 
may  be  that  the  bank  has  been  instructed  to  deliver 
the  documents  upon  acceptance  of  the  draft  (d  /a).  In 
this  case,  the  draft  is  usually  a  time  draft,  upon 
which  payment  is  due  in  one,  two,  three,  or  even  six 
months.  The  length  of  this  credit  period  is  determined 
according  to  the  customs  of  the  market  and  of  the 
trade.  Agricultural  countries  usually  require  long- 
time credit,  while  in  highly  industrialized  countries 
like  England,  France,  or  Germany,  good  service  and 
low  prices  are  bigger  selling  points  than  long  credit. 
Summary,  Foreign  trade  is  necessary  to  a  country 
and  must  consist  of  both  imports  and  exports.  Finan- 
cial relations  with  other  countries  may  cause  either 
imports  or  exports  to  exceed  for  a  long  period. 
Foreign  trade  may  be  carried  on  direct  or  indirect. 
Indirect  foreign  trade  takes  place  through  export 
merchants  and  export  commission  houses.  It  is 
necessary  to  study  the  market  carefully  so  that  the 
purchasing  power  of  the  market  and  the  character 


334  BUSINESS     ORGANIZATION 

of  the  goods  demanded  may  be  known.  Many- 
sources  of  information  are  available,  private  and 
public.  Chambers  of  Commerce,  banks,  and  mu- 
seums supply  information.  The  government  re- 
ports, especially  the  Commerce  Reports,  are  valuable. 
The  Government  also  aids  by  supplying  bonded 
warehouses,  by  allowing  combinations  for  export 
trade,  and  by  protecting  trade-marks.  It  is  neces- 
sary to  study  carefully  the  various  methods  of 
quoting  the  prices  and  quantities  of  goods,  and  the 
methods  of  payment. 

• 

REFERENCES 

B.  O.  Hough.  Practical  Exporting.  Johnston  Export 
Publishing    Company. 

J.  Anton  de  Haas.  Foreign  Trade  and  Shipping.  Alexan- 
der Hamilton  Institute. 

J.  R.  Smith.  Industrial  and  Commercial  Geography. 
Henry  Holt  and  Comoanv. 

QUESTIONS  FOR  FURTHER  STUDY 

1.  What  is  meant  by  a  favorable  balance? 
Reference:  Smith.    Part  II,  Chapters  I,  XV. 

2.  In  which  cases  is  selling  "direct"  advisable? 
Reference:   de  Haas.    Part  I,  Chapter  VII. 

3.  Are  all  Chambers  of  Commerce  like  the  American? 
Reference:  de  Haas.    Part  I,  Chapter  V. 

4.  What  is  the  Government  doing  to  help  the  develop- 
ment of  foreign  trade? 

Reference:   de  Haas.    Part  I,  Chapter  IV. 


BUSINESS      ORGANIZATION  335 

5.  What  conditions  led  to  the  passage  of  the  Webb- 
Pomerene  Law? 

Reference:  de  Haas.    Part  I,  Chapter  X. 

6.  How  may  prices  be  quoted  in  foreign  trade? 
Reference:  de  Haas.    Part  I,  Chapter  VHI. 

TEST  QUESTIONS 

1.  Explain  why  foreign  trade  means  both  importing 
and  exporting. 

2.  What  is  the  difference  between  an  export  merchant 
and  an  export  commission  house? 

3.  What  must  one  know  about  the  foreign  market 
before  he  can  safely  undertake  to  do  business  there? 

4.  What  private  sources  of  trade  information  are  open 
to  the  foreign  trader? 

5.  Why  was  the  Webb-Pomerene  Law  necessary? 

6.  What  is  a  sample  fair? 

7.  What  is  the  meaning  of  the  following  abbreviations  : 
f.o.h.;  c.i.f.;  d/p;  d/a;  B /L? 


336  BUSINESS     ORGANIZATION 


CHAPTER   XVI 

THE  TECHNIC  OF  FOREIGN  TRADE 

Checking  the  Order.  We  shall  first  describe,  step 
by  step,  how  an  order  is  filled,  and  how  it  reaches  the 
foreign  consumer.  This  description  of  making  an  ex- 
port shipment  will  be  followed  by  a  description  of 
the  process  of  importing.  When  a  foreign  order 
reaches  a  manufacturer,  it  is  referred  to  the  foreign 
department  or  export  department.  In  this  depart- 
ment it  will,  in  most  cases,  be  recorded  according  to 
the  following  method. 

The  mail  clerk  opens  the  letter  and  removes  the 
contents  from  the  envelope.  Upon  discovering  that 
it  is  an  order,  he  will  send  it  to  the  desk  of  the  credit 
man.  This  official  will  have  on  file  the  necessary  in- 
formation from  which  he  can  tell  whether  the  firm 
sending  in  the  order  is  reliable,  and,  if  so,  what  terms 
have  in  the  past  been  quoted  in  the  territory  from 
which  the  order  comes,  and  to  this  firm  in  particular. 
He  will  make  a  note  of  his  findings  and  attach  it  to 
the  order  which  is  now  passed  on  to  the  manager  of 
that  foreign  territory. 

The  manager  approves  of  the  order  and  instructs 
his  stenographer  to  write  a  note  acknowledging  the 
order  with  some  expression  of  appreciation,   and 


BUSINESS     ORGANIZATION  337 

whenever  possible,  he  indicates  the  probable  time  of 
dispatch  of  the  order. 

Preparing  the  Order,  Now  the  order  goes  to  the 
order  clerk.  It  is  his  duty  to  see  to  it  that  the  order 
is  properly  filled.  If  the  goods  are  to  be  bought  out- 
side he,  or  a  purchasing  agent,  must  send  out  re- 
quests for  quotations  and  place  the  order  at  the  best 
price.  If  the  goods  are  to  be  manufactured  the  pro- 
duction department  must  be  notified. 

The  goods  when  received  from  the  outside  source 
are  inspected  by  the  domestic  shipping  clerk  and 
passed  on  to  the  foreign  shipping  clerk,  who  knows 
how  goods  for  foreign  customers  should  be  packed. 
In  case  the  goods  were  in  stock,  the  stock  room  or  the 
production  department  delivers  them  to  the  foreign 
shipping  clerk. 

Procuring  Freight  Space.  Meanwhile  it  is  neces- 
sary to  procure  freight  space.  Staples  shipped  in 
large  quantities,  such  as  ore,  wheat,  cotton,  and  lum- 
ber, are  usually  handled  in  full  cargo  lots.  That  is  to 
say,  they  require  an  entire  vessel.  In  such  cases  it 
will  be  cheaper  to  charter,  i.  e.,  hire  a  tramp.  A 
tramp  is  a  ship  not  doing  regular  "line  service,^' 
which  picks  up  freight  where  it  may  be  found  and 
carries  it  to  any  place  desired.  The  rate  that  is 
charged  for  such  services  will,  of  course,  be  influ- 
enced by  the  distance,  the  time  required  for  the  trip, 
the  size  of  the  ship,  the  degree  of  competition  be- 
tween carriers,  and  also  by  the  likelihood  that  an 


BUSINESS     ORGANIZATION  339 

outward  cargo  will  be  secured  at  the  port  of  destina- 
tion. The  contract  between  the  shipowner  and  the 
shipper  is  called  a  charter  party.  A  shipper  need  not 
attend  to  all  details  himself.  He  may,  and  usually 
does,  secure  a  vessel  through  a  ship  broker  who, 
through  his  correspondents  in  many  ports  is  in- 
formed of  the  whereabouts  of  ships  and  of  freight 
waiting  to  be  moved. 

Manufactured  products,  however,  do  not  usually 
move  in  such  large  quantities.  Moreover,  because 
of  their  great. value,  and  because  almost  always  a 
definite  date  of  delivery  has  been  set  they  cannot 
move  on  slow  and  irregular  steamers,  but  must  make 
use  of  fast  reliable  line  service.  The  rates  may  be 
higher,  but  the  better  service  offsets  this  disad- 
vantage. 

In  asking  for  freight  space,  sufficiently  detailed 
information  must  be  furnished  so  that  the  steamship 
company  may  know  the  weight  and  volume  of  the 
shipment.  The  steamship  officials  need  this  infor- 
mation so  that  they  may  proportion  the  cargo  offered 
to  the  various  ships. 

The  steamship  company  now  makes  a  freight  offer 
which  must  be  accepted  without  delay.  Once  ac- 
cepted the  freight  space  is  reserved  whether  used  or 
not.  When  the  offer  is  accepted,  the  steamship  com- 
pany sends  a  shipping  permit.  This  is  an  order  to  the 
ship's  clerk  on  the  dock  to  receive  the  goods  when 
delivered. 


340  BUSINESS     ORGANIZATION 

Marine  Insurance.  This  shipment  must  now  be 
insured  against  the  dangers  of  the  voyage.  This  may 
be  done  by  taking  out  a  separate  pohcy  for  the  ship- 
ment, or  it  may  be  done  under  open  policy.  The 
open  poHcy  is  a  contract  between  shipper  and  insur- 
ance company  which  insures  all  goods  to  be  shipped 
during  a  certain  period.  All  that  is  necessary  under 
such  a  policy  is  to  notify  the  insurance  company  that 
a  certain  shipment  has  left  by  a  designated  vessel, 
whereupon  the  insurance  company  forwards  a  policy 
covering  the  shipment.  The  marine  insurance  policy 
is  frequently  made  to  cover  an  amount  in  excess  of 
the  cost  of  the  goods.  This  is  necessary  to  cover  all 
incidentals,  such  as  freight,  brokerage,  and  consular 
fees  and  interest  on  the  investment. 

Invoicing  the  Shipment.  The  preparation  of  the  in- 
voice is  a  difficult  piece  of  work.  The  document  must 
contain  a  careful  description  of  the  goods,  the  unit 
price,  the  total  price  for  each  group  of  articles,  and 
finally  the  grand  total.  From  this  must  be  deducted 
the  discounts  agreed  upon.  If  extras,  such  as  pack- 
ing, consular  fees,  freight,  and  insurance  are  to  be 
charged  to  the  buyer,  these  items  may  be  added  to 
the  bottom  of  the  invoice,  or  they  may  be  brought 
together  on  a  separate  sheet  called  a  "statement  of 
charges."  Foreign  invoices  must  always  be  signed  by 
the  export  manager  or  some  other  official  of  the 
concern.  The  laws  of  most  foreign  countries  re- 
quire this. 


BUSINESS     ORGANIZATION  34I 

The  boxes  containing  the  goods  should  be  marked, 
not  only  with  a  distinguishing  mark,  such  as  a  tri- 
angle or  a  square,  which  should  be  the  same  for  all 
cases  of  the  shipment,  but  should  be  also  numbered 
consecutively.  Upon  the  invoice,  each  box  should 
appear  separately  with  its  proper  number.  Many 
countries  require  this,  but  it  is  recommended  even 
when  not  required.  The  numbering  makes  it  a 
simple  matter  to  trace  each  box  and  to  discover 
shortage.  In  order  to  facilitate  the  sending  of  cable- 
grams relating  to  the  shipment,  each  invoice  should 
bear  its  own  cable  code  word,  and  at  the  top  of  the 
sheet  should  be  indicated  the  cable  codes  in  use  at 
the  office. 

The  invoice  clerk  after  carefully  making  out  the 
invoice  should  now  have  it  checked  with  the  boxes, 
which  may  then  be  closed  and  made  ready  for  the 
steamer. 

The  Boxes.  The  boxes  should  be  new  and  strong 
though  not  excessively  so,  and  the  boards  should  be 
fastened  with  screws  rather  than  with  nails,  which 
pull  out  easily.  It  is  always  best  to  strap  boxes 
carefully;  this  strengthens  the  boxes  and  also  pre- 
vents pilfering.  Many  countries  require  that  they 
be  marked  with  a  stencil  which  shall  indicate  the 
weight  in  kilos  and  pounds,  and  in  some  cases  the 
name  or  initials  of  the  consignee. 

The  Dock  Receipt.  The  boxes  are  now  ready  to  be 
sent  to  the  dock.    The  shipping  clerk  instructs  the 


342  BUSINESS     ORGANIZATION 

truck  driver  where  to  take  them  and  gives  him  the 
shipping  permit.  He  will  also  hand  him  another 
blank  filled  out  and  only  in  need  of  a  signature.  This 
is  the  dock  receipt.  The  driver  takes  the  boxes  to  the 
wharf  and  hands  the  cleric  at  the  dock  both  the  permit 
and  the  receipt.  The  permit  instructs  the  clerk  to 
receive  the  goods.  He  inspects  them  in  order  to  make 
sure  that  the  shipment  is  complete  and  corresponds 
with  the  statement  in  the  dock  receipt,  after  which 
lie  signs  the  dock  receipt.  The  driver  returns  the 
receipt  to  the  shipping  clerk  who  must  now  procure 
the  final  documents. 

The  Bill  of  Lading  (B/L).  The  dock  receipt  must 
be  exchanged  for  an  ocean  hill  of  lading,  which  is  not 
only  a  receipt  but  also  a  contract  to  carry  goods  to 
their  port  of  destination.  The  bill  of  lading  contains 
a  large  amount  of  reading  matter,  all  of  which  is  in- 
tended to  allow  the  company  to  disclaim  liability  in 
all  cases  except  negligence  on  its  part.  A  number 
of  copies  of  such  bills  of  lading  are  issued.  Some  of 
them,  usually  two,  are  signed ;  the  others,  sometimes 
four  or  five,  are  unsigned.  The  signed  bills  of  lading 
are  called  negotiable  bills  of  lading,  for  by  means  of 
them  the  ownership  of  the  goods  may  be  passed  from 
person  to  person.  All  that  is  necessary  is  to  indorse 
the  document  as  if  it  were  a  check,  or  any  other 
negotiable  instrument. 

The  unsigned  copies,  or  non-negotiable  bills  of 
lading,  are  used  for  purposes  of  record.    One  may  be 


BUSINESS     ORGANIZATION  343 

sent  to  the  consignee  to  show  him  that  the  shipment 
has  actually  taken  place.  One  copy,  which  is  left 
with  the  captain,  who  uses  it  to  make  out  his  list  of 
shipments,  the  manifest,  is  called  the  captain's  copy. 
Another  copy  may  be  kept  in  the  files  of  the  shipper 
and  still  another  in  the  files  of  the  steamship  com- 
pany. 

The  Export  Declaration.  The  Government  requires 
that  whenever  a  shipment  is  made,  whether  by  ship 
or  by  train,  to  some  foreign  country,  the  shipper  shall 
make  out  an  "export  declaration."  This  declaration 
gives  the  name  and  address  of  the  shipper,  the  name 
of  the  carrier,  the  name  and  address  of  the  consignee, 
and  a  detailed  description  of  the  articles,  with  values 
and  country  of  origin.  This  information  is  used  by 
the  customs  officials  to  prepare  the  statistics  of  ex- 
ports. Before  the  customs  officials  will  grant  clear- 
ance to  the  vessel,  the  captain  must  produce  the 
ship's  manifest  and  also  export  declarations  for  each 
separate  shipment.  Steamship  companies,  therefore, 
frequently  refuse  to  issue  bills  of  lading  unless  such 
export  declarations  are  produced. 

Other  Documents  Required,  Many  other  docu- 
ments may  be  required  before  the  shipment  is  ready 
to  leave  the  United  States.  In  the  case  of  process 
butter  and  meat  or  meat  products,  a  certificate  of 
government  inspection  is  required.  Where  the  goods 
exported  contain  materials  previously  imported  and 
upon  which  duties  have  been  paid,  the  government 


344 BUSINESS     ORGAN  I  Z  AT  I  O  N 

will  allow  a  refund,  or  drawback,  of  99  per  cent  of  the 
amount  paid.  A  "notice  of  intent"  must,  in  such 
cases,  be  made  out  cuid  filed  with  the  collector  of 
customs.  The  claim  is  then  investigated  by  the 
treasury  department. 

During  the  war  an  "export  license"  was  required 
for  every  shipment.  The  license  was  issued  by  the 
Wair  Trade  Board.  The  main  object  was  to  save 
tonnage  by  eliminating  unnecessary  imports  and  ex- 
ports, and  to  prevent  goods  from  reaching  the  enemy. 
Such  restrictions  are  not  found  in  peace  times. 

Requirements  of  the  Customs  A  uthorities.  In  order  to 
satisfy  the  foreign  customs  service,  a  number  of  docu- 
ments must  be  secured.  Frequently  one  or  more  bills 
of  lading  must  be  vised  by  the  consul  of  the  country  of 
destination.  The  same  official  attaches  his  vise  to  the 
consular  invoices  and  to  the  certificates  of  origin.  The 
consular  invoices  contain  substantially  the  same  in- 
formation found  in  the  commercial  invoice.  Fre- 
quently as  many  as  six  copies  must  be  made  and  cer- 
tified. The  consul  charges  a  fee  for  this  certification 
which  varies  according  to  the  countries.  French 
consuls  charge  $2.50  for  consular  invoices  and  $2.20 
for  the  certificate  of  origin. 

Disposition  Made  of  These  Documents.  These  docu- 
ments are  now  collected,  clipped  together,  and  sent 
to  the  foreign  consignee,  for  without  them  he  cannot 
receive  the  goods  from  the  transportation  company, 
nor  satisfy  the  customs  requirements.    If  the  agree- 


BUSINESS     ORGANIZATION  345 

ment  was  that  he  would  pay  or  accept  a  draft  upon 
the  receipt  of  these  documents,  the  exporter  will  ob- 
tain the  services  of  a  bank  to  make  the  collection. 

The  draft  may  be  discounted,  or  the  bank  may 
lend  a  certain  amount  of  money  on  it.  In  order  to 
make  the  collection  certain,  the  documents  are  then 
not  sent  to  the  consignee,  but  are  handed  to  the 
bank.  The  bank  will  see  to  it  that  these  valuable 
documents  do  not  pass  into  the  hands  of  the  con- 
signee until  he  has  lived  up  to  his  obligations.  Such 
a  draft  is  a  documentary  draft.  The  bank  will  make 
certain  that  these  documents  constitute  a/wZZ  set,  for 
if  any  one  of  the  negotiable  bills  of  lading  were  miss- 
ing, the  value  of  the  remaining  ones  would  be 
doubtful. 

Notifying  the  Consignee,  All  that  remains  now  is  to 
notify  the  consignee  by  means  of  a  letter;  this  is 
called  a  "shipping  advice."  In  this  letter  the  manner 
of  shipment,  the  manner  of  collecting  the  draft,  and 
the  company  with  which  the  insurance  has  been 
placed  are  indicated  along  with  such  other  details  as 
will  give  the  foreign  buyer  all  necessary  information 
about  his  goods. 

Such  letters,  in  fact,  all  communications  sent  to 
foreign  countries,  should  be  followed  by  a  carbon 
copy  dispatched  by  a  later  mail.  Care  should  be 
exercised  that  the  carbon  copy  actually  goes  by  a 
later  boat.  The  purpose  is  to  make  sure  that  the 
letter  will  reach  its  destination  even  if  one  boat 


346  BUSINESS     ORGANIZATION 

should  meet  with  an  accident.  For  the  same  reason, 
foreign  drafts  are  frequently  made  out  in  duplicate; 
in  some  cases  as  many  as  three  or  four  copies  are 
made  out.  These  are  called  according  to  the  number, 
the  first,  the  second,  the  third,  etc.  In  the  body  of 
the  drafts  the  number  of  copies  which  have  been  pre- 
pared is  then  noted. 

The  Functional  Middleman.  It  is  plain  that 
making  an  export  shipment  is  no  simple  matter.  It 
requires  knowledge  of  technical  details^  and  great 
accuracy.  Exporters  who  do  not  possess  the  neces- 
sary information  or  do  not  want  to  give  the  time  and 
attention  which  these  shipping  details  demand,  make 
use  of  freight  forwarders.  Manufacturers  situated 
inlcind  also  make  use  of  these  middlemen  because  this 
is  the  simplest  way  in  which  they  can  obtain  repre- 
sentation in  the  port. 

The  freight  forwarder  will  attend  to  all  shipping 
details,  thereby  relieving  the  shipper,  but  this-  is  by 
no  means  the  only  function  he  performs.  A  large 
shipment  usually  receives  better  accommodations, 
both  on  land  and  water,  and  the  rate  for  each  unit 
of  a  large  shipment  is,  therefore,  lower  than  on  a 
small  shipment  traveling  independently.  It  costs  as 
much  to  send  one  pound  as  to  send  a  ton,  for  freights 
are  usually  expressed  in  tons  and  steamship  com- 
panies have  established  the  custom  of  requiring  a 
"minimum"  bill  of  lading,  which  means  that  five  or 


BUSINESS     ORGANIZATION  347 

ten  dollars,  as  the  case  may  be,  will  be  charged,  no 
matter  how  small  the  shipments. 

Consequently  by  combining  many  small  shipments 
into  one  large  shipment,  the  charge  per  individual 
shipment  will  be  much  less  than  when  shipped  sep- 
arately. Freight  forwarders  share  part  of  these  ad- 
vantages with  their  customers  and  are,  therefore, 
able  to  quote  favorable  rates  and  to  give  good 
service. 

In  many  cases  the  United  States  Government  is 
willing  to  refund  duties  paid  upon  foreign  articles 
when  they  are  re-exported.  This  refund  of  duties  is 
called  a  drawback.  It  is  necessary  to  enter  a  claim 
for  this  refund  at  the  time  of  re-exportation.  Ex- 
porters intending  to  claim  drawbacks  find  that  draw- 
back brokers  who  specialize  in  that  line  of  work  can 
attend  to  these  matters  more  efficiently  than  they, 
while  customs  brokers  offer  their  services  to  all  those 
who  import  goods,  and  who  need  assistance  in  meet- 
ing the  requirements  of  the  U.  S.  Customs  Service. 

Importing.  We  hear  much  about  exporting  and 
how  the  future  of  the  United  States  depends  upon  it. 
But  importing  is  equally  important.  Without  im- 
porting we  would  not  only  be  forced  to  forego  many 
necessities  and  many  more  luxuries,  but  our  indus- 
tries would  not  be  able  to  produce  many  things 
which  now  are  marketed  at  home  and  abroad. 

Much  of  our  importing  is  in  the  hands  of  foreign 
firms.    Japanese  goods  are  brought  into  this  country 


348  BUSINESS     ORGANIZATION 

by  natives  of  Japan,  while  Armenian  and  Turkish 
rugs  are  imported  largely  by  natives  of  those  coun- 
tries. This  is  quite  natural  since  such  specialized 
articles  require  a  thorough  knowledge  of  the  product 
and  of  the  customs  of  the  market.  They  are,  to  a 
large  extent,  the  product  of  home  industry  and  must 
be  bought  up  by  native  buyers  who  travel  from  town 
to  town  and  collect  them,  after  which  they  offer  the 
goods  for  sale  to  either  native  or  foreign  buyers. 
Many  products  find  their  way  in  this  fashion  into  the 
channels  of  foreign  trade.  Chinese  tea  furnishes  an 
example.  It  is  bought  from  the  small  farmer,  sorted, 
and  graded  by  the  collector,  and  branded  with  his 
chop  or  trade-mark.  The  fact  that  it  is  difficult  to 
secure  uniform  and  reliable  quality  in  this  way  is 
responsible  for  the  decline  of  the  Chinese  tea  trade. 
The  English  tea,  raised  on  large  plantations  under 
single  ownership  and  cured  according  to  standard 
methods,  is  uniform  in  quality. 

Buying  Methods.  As  in  export  trade,  goods  are 
imported  direct  or  indirect.  Many  domestic  im- 
porters supply  their  needs  through  commission 
houses  w^ho  place  their  orders  in  foreign  countries. 
Some  of  these  commission  houses  are  American, 
others  are  foreign  houses.  There  are  also  numerous 
importers  who  import  for  their  own  account — they 
correspond  to  the  export  merchant  in  export  trade — 
and  who  supply  the  domestic  wholesale  houses  and 
retailers. 


BUSINESS     ORGANIZATION  349 

The  United  States  Customs,  When  Importing  goods 
into  the  United  States,  the  United  States  customs 
regulations  must  be  fulfilled.  Since  changes  in  the 
tariff  or  changes  in  the  interpretation  of  the  regula- 
tions affect  the  amount  of  the  import  duty,  goods  are 
sometimes  sold  before  importation  subject  to  changes 
in  the  tariff.    This  protects  the  importer. 

It  is  ijnportant  to  know  what  documents  are  re- 
quired and  how  goods  are  cleared  through  the  custom- 
house. Usually  three  consular  invoices  are  required. 
They  must  contain  a  description  of  the  goods,  their 
value  at  the  port  of  exit,  expressed  in  the  currency  of 
the  exporting  country. 

In  the  case  of  American  goods  re-imported,  a 
special  form  of  consular  invoice  is  needed;  a  re- 
importation certificate.  In  addition  to  this,  there  are 
many  special  documents  required  in  the  case  of  arti- 
cles like  hides,  food,  and  drug  products. 

A  number  of  articles  may  be  imported  "in  bond.'' 
This  means  that  no  duty  need  be  paid  as  long  as  the 
goods  remain  in  a  specified  place,  usually  a  bonded 
warehouse.  Should  the  owner  desire  to  remove  them 
from  this  warehouse,  then  he  must  first  pay  duty. 
All  other  goods  are  subject  to  a  cash  entry,  i.  e.^  the 
owner  declares  that  he  is  prepared  to  pay  duty  im- 
mediately. The  first  step  is,  therefore,  to  determine 
the  amount  of  the  duty.  The  duty  is  based  upon  the 
value  and  quantity  of  the  goods.  Information  in  re- 
gard to  these  facts  is  contained  in  the  consular  in- 


350  BUSINESS     ORGANIZATION 

voice.  The  appraiser  at  the  port  of  entry,  however, 
determines  whether  this  declaration  is  in  accordance 
with  the  facts  and  when  he  discovers  that  the  de- 
clared valuation  is  less  than  the  appraised,  an  addi- 
tional duty  of  I  per  cent  of  the  appraised  value  is 
levied  for  every  i  per  cent  by  which  the  value  was 
understated.  An  understatement  of  75  per  cent  or 
more  is  considered  3,  fraudulent  entry,  and  is  punish- 
able by  heavy  fine,  confiscation  of  goods,  and  im- 
prisonment. 

This  appraisal  takes  time.  In  order  to  expedite 
the  passing  of  the  goods  into  the  hands  of  the  owner, 
the  customs  officials  may  retain  a  small  portion  of 
the  goods,  never  less  than  10  per  cent,  and  allow  the 
bulk  to  be  taken  away  after  a  deposit  has  been  made 
large  enough  to  make  certain  that  the  duties  will  be 
paid.  After  the  amount  of  the  duties  has  been  deter- 
mined, a  delivery  permit  is  issued  as  a  receipt  for 
the  payment  of  the  duties  and  the  goods  are  released. 

How  the  Appraisals  Are  Standardized.  Opinions  of 
persons  in  regard  to  the  "true  market  value"  of  an 
article  differ,  and  such  differences  may  lead  to  dis- 
putes in  regard  to  the  duties  to  be  paid.  For  this 
reason  an  importer  who  disagrees  with  a  judgment 
rendered  by  the  appraiser  may  appeal  to  the  United 
States  Board  of  General  Appraisers  and  to  the  United 
States  Customs  Court  of  Appeals.  Many  trades 
have  prepared  samples  of  the  most  common  grades 
of  their  importations  in  order  to  facilitate  the  work 


BUSINESS     ORGANIZATION 35I 

of  the  appraisers.  The  Comparative  Value  Report 
Bureau  acts  as  a  clearing  house  for  this  information 
and  aids  in  securing  more  uniform  methods  of  ap- 
praisal at  the  various  ports  of  entry.  Notwithstand- 
ing these  safeguards,  certain  ports  of  entry  are  known 
to  be  more  lenient  and  lax  than  others  in  their  appli- 
cation of  customs  regulations,  and  importers  through 
other  ports  are,  therefore,  somewhat  under  a  dis- 
advantage. It  is  impossible  to  bring  absolute  uni- 
formity in  the  application  of  a  system  so  involved 
and  detailed  as  the  United  States  Tariff. 

Summary.  When  an  order  has  been  received  it  is 
passed,  first  of  all,  to  the  credit  man,  after  which  it 
reaches  the  order  clerk,  who  proceeds  to  fill  it.  The 
shipping  clerk  secures  freight  space,  and  looks  after 
the  insurance.  The  invoice  clerk  makes  out  the  in- 
voice and  checks  it  with  the  goods  and  with  the  order. 
The  goods  are  taken  to  the  wharf  where  the  shipping 
permit  is  exchanged  for  the  dock  receipt  which  in 
turn  is  exchanged  for  the  bill  of  lading. 

The  documents  required  are:  the  export  declara- 
tion, the  certificate  of  origin,  and  the  consular  invoice 
or  invoices.  The  documents  are  pinned  to  the  draft 
as  it  is  taken  to  the  bank  to  be  discounted. 

Importing  is  of  equal  importance.  Much  import- 
ing is  in  the  hands  of  foreigners.  Importing  may 
take  place  direct  and  indirect.  The  United  States 
Customs  regulations  require  three  consular  invoices. 
Goods  may  be  imported  in  bond.     If  goods  are  en- 


352  BUSINESS     ORGANIZATION 

tered  for  consumption  a  cash  entry  is  made  and  duty 
is  paid  immediately.  The  goods  are  appraised  by  a 
government  appraiser.  It  is  difficult  to  secure  uni- 
formity in  these  appraisals. 

REFERENCES 

See  references  of  preceding  chapter. 

QUESTIONS  FOR  FURTHER  STUDY 

1.  What  information  should  the  salesman  send  in  to 
the  home  office? 

Reference:  de  Haas.     Foreign  Trade  and  Shipping, 
Part  I,  Chapter  IX. 

2.  What  is  the  meaning  of  a  clean  hill  of  lading? 
Reference:   de  Haas.    Part  II,  Chapter  II. 

3.  What  different  kinds  of  tons  are  used  in  describing 
cargo? 

Reference:   de  Haas.    Part  II,  Chapter  I. 

TEST  QUESTIONS 

1 .  Trace  an  order  through  the  export  department. 

2.  What  is  a  charter-party? 

3.  What  is  an  open  policy  of  marine  insurance? 

4.  What  information  should  be  contained  in  an  in- 
voice and  how  should  it  be  checked? 

5.  Enumerate  the  documents  that  must  be  secured  to 
make  a  shipment,  beginning  with  the  engaging  of  freight 
space  until  the  goods  are  on  their  way  to  the  foreign 
customer. 


BUSINESS     ORGANIZATION  353 

6.  What  different  middlemen  have  been  mentioned 
and  of  what  does  their  work  consist? 

7.  What  is  meant  by  a  re-importation  certificate ^  a 
notice  of  intent^  a  cash  entry? 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
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